We are all familiar with rollover IRAs, but in Massachusetts, residents have a unique right and opportunity to rollover some or all of the proceeds from one principal residence to another without subjecting those rollover proceeds to creditor claims. First, let’s understand what a Massachusetts Homestead is and what it provides for: M.G.L. c.188 §2 provides that a person’s principal residence or one that they intend to occupy as a principal residence shall be protected against attachment, seizure, execution, levy or sale to pay certain debts or legacies if §5 is adhered to (some restrictions apply). If you are not elderly or disabled, and provided that you properly record a homestead on homesteaded property, the exemption amount is $500,000.00. If you forget to record a homestead, don’t despair, M.G.L. c. 188 §4 provides for an automatic homestead of $125,000.00, but is more restrictive than other created homesteads.
However, if you elect to sell your home, there are protections both under Massachusetts law and Bankruptcy Code which permit one to “rollover” the proceeds from one homesteaded property to another, up to the amount of the applicable cap.
In a recent case decided by Judge, Frank J. Bailey, In Re Meguerditchian Eastern District of Massachusetts, Docket No. 15-13288 FJB, the Debtor was successful in arguing that the provisions of 11 U.S.C. §522(p)(2)(B) of the Bankruptcy Code allow for the rollover of “equity” from one property to another, despite the fact that the new property was purchased before the old property was sold, thus preserving the $500,000.00 exemption under the Massachusetts homestead. In Meguerditchian the creditor and Chapter 13 Trustee argued that the Debtor was limited to a $155,675.00 homestead cap because he acquired his home within 1,215 days of filing a bankruptcy petition. The Debtor had used $500,000.00 from the sale of his old property to pay down a $500,000.00 mortgage.
The rollover provisions of 11 U.S.C. §522(p)(2)(B) closely align with the Massachusetts homestead rollover provisions of M.G.L. c 188 §11 in which, and so long as the owner of the property uses the proceeds from the sale of a homesteaded property to purchase another homesteaded property within one (1) year, the proceeds retain the protections afforded to the homeowner, despite the fact that the property is sold and not immediately replaced.
Judge Frank Bailey overruled the Chapter 13 Trustee and creditor’s objections to the Debtor’s claim of homestead and found that the Debtor’s “rollover” of the proceeds from one homesteaded house to another (the equity) was permissible.
The rules regarding rollover homesteads, both in the Bankruptcy Code and Massachusetts statutes are technical and must be strictly adhered to. Consult a professional to avoid the pitfalls and an additional expense of having to defend a Homestead.
The full text of the Lawyers Weekly article and case can be found at Massachusetts Lawyers Weekly.
The contents of this article are not to be construed as legal advice or an obligation to act for any particular person. The opinions expressed are those of the author.