Court Allows Homestead Exemption for Duplex Used for AirBnB

A Massachusetts bankruptcy court has ruled that a duplex used both as the debtors’ residence and an Airbnb rental qualified for Massachusetts’s homestead exemption. The chapter 7 debtors in In re Shove[1] moved to avoid a million-dollar judgment lien on their real property, arguing that the lien impaired their homestead exemption. The debtors valued their duplex at $195,400, with a mortgage balance of $162,125. The lienholder objected to the lien avoidance. Although the lienholder conceded that the debtors’ property was a “home” and that the property was the debtors’ principal residence, the lienholder argued that he was entitled to an evidentiary hearing to determine what percentage of the home was used for commercial purposes. The lienholder’s argument was based on a previous case in that district[2] in which the court employed a “predominant use” test to determine whether a property with both residential and commercial uses qualified for the homestead exemption. If the “predominant use” was for commercial purposes, then under the Catton test the property did not qualify.

The court in Shove, however, refused to apply the Catton test, arguing that the homestead statute was clear that any property qualifying as a “home” that the debtor uses as his or her “principal residence” would be entitled to the exemption. Because the statute was clear, the court did not agree with the “predominant use” requirement set forth in Catton. The court further reasoned that it would have to interpret the statute from the perspective of the Massachusetts Supreme Judicial Court, which liberally construes the homestead exemption. The predominant-use test conflicted with that liberal construction, at least on the facts of the Shove case.

The Shove opinion does not necessarily mean that bankruptcy courts in other states would follow the same path. Notably, Massachusetts has one of the most generous homestead exemptions in the country, with an “automatic” exemption of $125,000 and an exemption of $500,000, if the owners file a Declaration of Homestead in the county records. In addition, Massachusetts’s statute broadly defines “home” to include not only single-family dwellings but also two- to four-unit dwellings (among other things). Accordingly, whether other courts would hold the same would depend on the interpretation of the specific state’s statute. In Florida, for example, the rental of “all or substantially all” of a dwelling can result in the abandonment of the homestead exemption. Other states may also have more restrictive definitions of homestead.