Beware of ‘first-year-free’ condo fees

There's likely a catch that no homeowners will like

DEAR BENNY: I am a real estate developer, homebuilder and property manager in California. The California Department of Real Estate requires extensive disclosure documents for the sale of property in all common-interest subdivisions. Those disclose great detail on the use of all funds collected from homeowners association dues. The DRE also requires that full HOA dues be paid for all units within a development (or a phase of that development if approved as a phased development) upon the sale of the first property (home or empty lot) within that development (or phase).

In fact, even the developer must begin to pay HOA dues on unsold homes or lots in the development (or phase) once the first property is sold. The DRE allows no distinction between whether or not the property is improved with a home. Once the first property is sold and the HOA is activated, all of the properties must pay the full HOA dues allocated per property. –William

DEAR WILLIAM: From my experience, that is the law throughout the United States. Basically, the minute the developer records the condominium documents among the land records where the property is located (even though no units have yet been sold), the condominium association comes into existence.

At first, the developer and his friends and cronies are the board of directors. But they wear two hats: Clearly they represent the developer, but they also have a fiduciary duty to all existing and future condo owners.

And because there is now a condominium association — and thus condo units — the condo fees must be paid. Because the developer still owns units, he must pay the condo fees for the units he owns.

However, some developers try to avoid this by telling unit owners that for the first year, unit owners do not have to pay any fee, and that the developer will pay all expenses. This sounds very attractive; but at the end of the year, the unit owners discover they have been left with absolutely no reserves against future problems.

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Bottom line: If you plan on buying a new condominium, read the legal documents very carefully; if you need assistance, ask a real estate lawyer to spend an hour or two to explain the pros and cons of that potential purchase.

It’s your money: Protect it!

DEAR BENNY: In a recent column you responded to a married couple regarding the sale of their residence and the tax exemption allowed. What if the owners are not married?

My sister and I own a multiunit building. One unit is my residence; one unit is occupied by my sister’s daughter; and one unit is rented. My sister and I are 50/50 owners.

If we sold the property would I qualify for a $250,000 exemption? Would my sister have to live in the building for two years prior to the sale to qualify for her $250,000 exemption? –Jim

DEAR JIM: The sale price would be prorated in a logical way. If the three apartments are all equal in square footage, then it would be one-third, one-third, one-third.

If you have lived in the property as your primary residence for two of the five years prior to sale, then you will qualify for the Section 121 exclusion. That means that because you are single, you can exclude up to $250,000 of your profit. Keep in mind, however, that your profit is but one-third and not the entire profit you will have made on the entire building. You both may have to pay any capital gains tax on the profit you make on the investment portion of the building.

You really need to discuss all this with an accountant.

For your sister to qualify, she would have to live in one of the other apartments as her primary residence for two of the past five years also.

DEAR BENNY: My sister took power of attorney when my mother died, taking over the finances of my father. My father, sister, brother and I have a life estate on my father’s property.

My brother and I have recently learned that the property is in danger of foreclosure; apparently our sister had not been paying the mortgage, even though she had the funds through our dad’s income. Also, she has arranged some sort of modification of the existing loan without our knowledge or even without our signatures.

Do we have any recourse in trying to save the house? Our sister has now put the property on the market trying to arrange a short sale. The mortgage company is saying that we need $6,000 to stop the foreclosure. –Elizabeth

DEAR ELIZABETH: You and your other siblings must contact a lawyer immediately. Obviously, you want to save the house, especially because your father has an interest in the property.

I will address only one of your many questions: Can a lender make a loan (or a modification or even a refinance) without obtaining the written consent of those who have a life estate?

State law will differ on this, so my answer has to be general in nature. I believe that a remainderman (the person who will own the property when the life estate(s) end) can mortgage his or her interest in property. However, as a practical matter, I doubt that any lender will allow this without obtaining the signatures of all parties who have an interest in the property, which includes life estate tenants.

Why? Because if the life estate tenants did not sign, and the loan goes into default, the lender can foreclose only on the remainderman’s interest; the life tenant’s interests cannot be touched because he or she did not sign any deed of trust or mortgage document.

It also raises an interesting question if a lender were to make such a loan to a remainderman. Generally, the remainderman is responsible for paying the principal on a mortgage and the life tenant to pay the interest. In a case where the life tenant has not consented to a transaction, I think he’d have a good argument against paying the interest.

DEAR BENNY: As a certified public accountant, I disagree with your advice that a giftee of real estate would have to hold the property for 12 months to get long-term gains treatment. Not so: If sold at a gain, you tack on the holding period of the donor (or giver) of the property. –Ed

DEAR ED: Many thanks. I researched this issue and you are correct. Capital gains tax is currently 15 percent of your profit; otherwise, your profit is taxed at ordinary income rates, which can be considerably higher.

We are discussing investment real estate. If you sell your principal residence, and have lived and owned it for at least two years out of the five years before sale, you can exclude up to $250,000 of your gain (or up to $500,000 if you are married and file a joint tax return.)

Typically, to qualify for capital gains treatment, you have to hold the investment property for at least 12 months. But, as Ed corrected me, if you obtained the property as a gift, you can add (tack on) the period that your donor owned it.

And if you sell property that you just inherited, it is taxed at the capital gains rate even if you did not hold the property for one full year. The law automatically treats inherited property as if it has been held for one year.

As always, I welcome comments and critics from readers.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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