TexasHomestead Exemption Not Limited By Property Tax Homestead Designation

By Roger Cox *

The Headline

The statutory and constitutional Texas Homestead Exemption is not limited by, and is distinguished from, a property tax homestead exemption. 

The Case

In re Terrill, 2018 WL 3025399 (Bankr. N.D. Tex. 2018) (Jones, J.).

The Facts

The debtor and his wife owned an 89-acre tract of land, which would be considered “rural” in nature in the context of the Texas Homestead Statute.  The debtors had previously designated two acres of that larger tract as “homestead” for purposes of property tax relief under the Texas Tax Code.  That two acre tract included the debtors’ main house and barn.

Later, the debtors sought bankruptcy relief, choosing state exemptions and claiming the entire 89-acre tract as exempt homestead under Chapter 41 of the Texas Property Code (which generally provides a 200-acre rural homestead).

A creditor objected to the homestead exemption, arguing that the debtors were limited to the two acres previously designated for property tax purposes.

There seemed to be little question as to the debtors’ use and occupancy of the property for broader homestead purposes.  Rather, the issue was whether the debtors were limited by the previous property tax related designation.  This argument was apparently based upon the creditor’s reading of Section 41.005 of the Texas Property Code, which governs voluntary designation of homesteads, providing, in part, that a property tax related designation can suffice as a broader homestead designation.

The Bankruptcy Court was not swayed, noting that such a reading of that statute “ignores the almost sacred homestead protection guaranteed by the Texas Constitution.”  The court further noted that there was no express provision in the statute that Section 41.005 would in any way override the broader constitutional and statutory homestead.  In other words, the property tax related designation would not estop the debtors from taking full advantage of the Texas homestead scheme.

In any event, establishing a homestead claim generally requires an “overt act in furtherance of the requisite intent” of claiming a homestead.  Earlier authority recognized that merely filing a homestead designation does not, by itself, constitute such an overt act.  The corollary to that, it would seem, is that a debtor would likewise not be limited by such a filing, especially when the filing is related to the more narrow issue of property tax relief.

Accordingly, the Bankruptcy Court overruled the creditor’s objection, and the debtors were allowed to claim the full rural homestead exemption as to the 89 acres.

Our Take

Although the creditor presented a novel issue to the Bankruptcy Court, the Bankruptcy Court correctly applied the broader homestead protection allowed under the Texas Constitution and Texas Property Code.  In effect, the homestead exemption for purposes of property taxes serves a narrow purpose – that is, a limited form of tax relief provided to Texas property owners.  That property tax exemption does not fully address broader issues regarding occupancy and usage of property claimed as a homestead.  Obviously, debtors cannot use this to dissemble or make inconsistent filings, but on the other hand, the broader concepts of the homestead protections should (and do) trump the more narrow issue of property tax relief.

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2018), and a former contributor to the SMU Law Review.  He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization.  Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.

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