DEAR BENNY: My husband and I each have a trust, and our house is in my trust. We have lived in this house for 14 years. If we were to sell it, would we qualify for the $500,000 tax exemption? I understand each person is permitted $250,000, and a couple twice that amount. Does my trust make a difference, and if so, what should we do? –Arlene

DEAR ARLENE: Is your trust revocable? A typical revocable living trust is a disregarded entity for tax purposes. This means that you are considered the real owner, even thought it is titled in your trust. If the property is sold while you are both alive or within two years of when one of you dies, then (if you meet the "ownership and use" tests) you can claim the full up-to-$500,000 exclusion of gain.

What is the "ownership and use" test? For married couples, to be eligible for the exclusion, there are several requirements:

1. You must file a joint tax return.

2. Either you or your spouse must have owned the house for at least two years during the five-year period ending on the sale of the house.

3. Both you and your spouse have lived in the house for at least two years during the five-year period ending on the sale of the house (i.e., the "use" test). This does not mean continuous; so long as you can prove that you lived in the house at least 730 days (365 multiplied by 2) during the five-year period, that’s OK. And temporary absences such as vacations are counted as periods of use.

4. Either you nor your spouse has claimed this exclusion for another house during the two-year period ending on the date of sale.

If a spouse dies, the survivor can still take advantage of the up-to-$500,000 gain exclusion if the following conditions exist:

  • Nos. 2, 3 and 4 above are applicable;
  • the sale took place after 2008; and
  • the sale took place no more than two years after the date of death.

Note: This does not mean that you can exclude $500,000 on your income tax return. It is "up to," so that if your profit was $400,000, that would be the limit of your exclusion.

For more information, the Internal Revenue Service has Publication 523, "Selling your Home," available free on its website.

DEAR BENNY: One year ago I purchased a townhome, and it is part of a growing development. A few months ago I stopped making payments to the association group after learning it didn’t exist because not all the units have been sold and development is still ongoing.

Two weeks ago my water was turned off and I still have no water. First, I contacted the developers who told me I needed a city water meter. I contacted the city water department and was told there’s a meter already on property for the whole development, and that I "didn’t exist" in living at the unit.

The developer has not returned my phone calls and no one can give me an answer as to why my water was the only unit turned off without notice. Your advice would be very much appreciated. –Luis

DEAR LUIS: I would immediately contact the elected officials in your area — i.e., a city councilperson, a local alderman, the mayor or even your state representatives. They are elected by the people and should serve the people.

I would also talk to the other owners and see if you can get their support, both financially so as to retain a local attorney as well as physically. There is strength in numbers.

I have to disagree with you, however, when you say that the association does not exist. Assuming that the developer recorded the legal documents creating your homeowners association, the minute those documents were recorded among the land records in your jurisdiction, the association was formed.

Currently, the developer is most likely in charge of the board of directors. There is case law throughout this country stating that when a developer is on the board of directors of the association he created, the developer wears two hats: developer and director. And as director, he must be responsive to all of the existing homeowners. It is called "fiduciary duty."

I suspect that the developer probably did not pay all of the water bills and that’s why your water was shut off. But your local officials and an attorney should be able to assist.

One other thought: Go to your local newspaper; they may be interested in the human-interest story of a homeowner whose water was shut off and the water department says you don’t exist.

DEAR BENNY: We entered into a contract to purchase a property for $350,000 from a speculator that was in the process of being foreclosed in late 2007. The negotiated price was just sufficient to cover the seller’s mortgage and closing costs including broker fees, but upon receiving the preliminary settlement statement from the title company, the seller disclosed two additional secondary mortgages totaling $130,000.

As these loans were not discovered during the title search, the title company further reviewed the mortgages and determined that the liens had not been properly recorded and therefore were not valid claims against the property. As the title company issued a clean policy, our attorney did not take issue and we completed the purchase of the property in January 2008.

Approximately eight months later, we received a letter from an attorney threatening to foreclose on the property on behalf of the persons who had loaned the seller/speculator funds from their 401(k) accounts.

We contacted the title company but were informed that our claim was premature, as the parties had not formally attempted to foreclose on the property. We never did hear from that attorney again, and in January 2009, we refinanced the property with a local bank without any problem and later completed a $300,000 renovation/expansion project.

In September 2011, we applied to refinance our mortgage through our existing bank (same as in 2009). When the bank’s new title company (different from 2009) performed the title search, the two secondary mortgage liens appeared on the document. The new title company reviewed the documentation from 2009 and 2008 and indemnified the title policy so that we were again able to refinance the property.

However, our bank recommended that we pursue a claim with our original title company because the two secondary mortgages were now appearing on the title policy. We then learned that the original title company had since been acquired by another during the economic recession.

We filed a claim with the successor title company, and were again informed that our claim was premature because we had not incurred any loss. I had thought the reason for obtaining and paying for title insurance was to protect against potential claims against a property, and therefore the title company should take action to clear the title because the original policy had been issued unencumbered.

While we have no plans to sell the property, I am concerned that someday we could find ourselves in a situation where we want to or are forced to sell, and that potential buyers would be spooked by the presence of the two "invalid" mortgage liens on the title policy.

What are your thoughts, and how should we proceed? –Brad

DEAR BRAD: The answer depends on whom you talk with. Many title insurers will take the position outlined in your letter and deny coverage because the claim is "premature." But most attorneys who do not represent title companies would insist that the original title company clear this up at their expense.

Were those two mortgages actually recorded before you went to settlement? When you were contacted by the attorney who threatened foreclosure, you should have immediately discussed the matter with your attorney. Because the original title company was aware of the existence of two mortgages, I believe it should not have ignored you and called it "premature."

But currently, it is what it is. And to date, you do not know whether those two mortgages have been paid off. That is something you (or your lawyer) should determine. Clearly, if the loans no longer exist, they must be released from land records. If all interested parties are not around (or cannot be located), you may have to file a suit to "quiet title."

But if they are still are owed, then you definitely have to file that "quiet title" lawsuit.

In either situation, I would also include all of the title insurance companies you have dealt with thus far as party defendants. I believe one of those companies has to stand up to defend you instead of "kicking the can" down the road.

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