Inman

Walkaway paves path to prison

DEAR BENNY: I know someone who has qualified to obtain a second house by stating that he will rent his first house; however, he has no intentions of actually renting it. Upon obtaining the new house, he plans to walk away from the first house, letting it go into foreclosure. He will already own his new house before his credit is hurt by the foreclosure, and he plans to live in the new house until the foreclosure is removed from his credit report in seven years, so he sees it as the perfect plan. Is that legal, especially since he qualified for the new loan with false information? Is there anything I should warn him about? –Kevin

DEAR KEVIN: What a clever approach. Your friend will be the head of his class when he is incarcerated. Falsifying information on a mortgage loan application is a federal offense.

At the bottom of all settlement statements (called a "HUD-1) you will find the following language:

WARNING: It is a crime to knowingly make false statements to the United States on this or any similar form. Penalties upon conviction can include a fine and imprisonment. For details see: Title 18 U.S. Code Section 1001 and Section 1010.

Section 1001 of our federal law makes it a crime to make "any materially false, fictitious or fraudulent statement or representation," and the penalty can be a fine and imprisonment for not more than five years. Section 1010 deals with making false statements to induce the Department of Housing (including the FHA) to issue mortgage insurance or mortgage loans. Here, the penalty can be a fine and imprisonment for not more than two years.

I suggest that you tell your friend that he should (1) immediately rent out the house and (2) get himself a good criminal attorney. Need I say more?

DEAR BENNY: I purchased a condominium 12 years ago, but have increasingly been unable to obtain service on the structural elements or on upkeep of the common grounds adjacent to the unit. This includes a drainage problem that causes the floor in the entry area to rise 1/2 inch when the ground is saturated in the spring.

I have obtained confirming reports from structural engineers, made presentations to the board, and this problem is still unresolved after nine years. I had to put in my own lawn this year, because the association just goes through the motions of lawn care. I pay $3,200 per year for care of the unit, and now receive almost nothing in return. The association has plenty of money in reserves in the bank so there is no reason for intransigence.

The problem has gone on for so long that the aggravation is impacting my health. I cannot sell the unit until repairs are made, and I cannot make the repairs myself. The problem here appears to be that people (with a lot of power in this small pond) do not like me. I have met with attorneys who tell me it will cost about $10,000 to prepare for litigation. I am retired, and would like to spend that sum on something other than legal expenses. I have tried the attorney general’s office, but they do not handle this in Missouri. The primary problem is caused by drainage that does not meet the county building codes, but the county does not enforce its own building code. Have you any less costly suggestions that might be available to me? –E.H.

DEAR E.H.: It seems that you have exhausted all avenues short of litigation, so I think that you will have no alternative but to sue your association. And unless there is some language in your legal documents that would allow you to get your legal fees paid by the association (should you prevail), unfortunately you will have to pay your own attorney.

Here’s a suggestion, however. Why not withhold your monthly condominium assessment and put it with a bank or your attorney? Let the association file suit against you, and by way of a counterclaim you can raise all your concerns.

I normally do not like to make the recommendation not to pay association fees. Every owner in a community association has the legal obligation to pay his or her share of the assessments, and if you have a complaint you have to raise it separately.

But in your case, it does not appear that you are getting your money’s worth from your association, so you may want to try the withholding route. However, you must be prepared with an attorney should the association take legal action against you for nonpayment. You must discuss this with a lawyer who understands and practices community association law.

DEAR BENNY: My mother is the sole owner of her property with no mortgage. Can she change the title to joint tenants adding other owners so the home will be automatically transferred upon her death to any surviving joint tenants? And if so, can she designate herself being owner of 95 percent and the other joint tenants sharing 5 percent? –Marty

DEAR MARTY: Your mother has the absolute right to add other owners and have title pass on her death to the other joint tenants. However, there are taxable issues involved for your mother as well as for those who will be added to title.

As for joint tenants holding unequal shares, that’s a matter of state law in the jurisdiction where the property is located. In law school, we lawyers are taught the "four unity test," an old common law concept that a joint tenant could be created only if all four unities were present: time, title, interest and possession. That meant that every joint tenant had to have equal shares, and in fact has become a presumption in the law.

However, this presumption can be overturned, and many cases throughout the country have allowed unequal shares for property held as joint tenants. But once again, you have to get specific advice from your own local lawyer.

DEAR BENNY: I bought a Florida condo 10 years ago (second home) as a single person. Now I’m married, but still hold title in my name. The market has dropped, but I hope to sell it when the market recovers in a few years. Before the market slump, Realtors told me it was worth about $850,000-$900,000. Having bought the condo for $215,000, maybe it is now worth about $575,000-$625,000, according to some Realtors. How can I best plan to avoid capital gains tax when I do have a buyer? –Nita

DEAR NITA: Many years ago, a congressman friend told me that he made a lot of money on his house, and it was the great American way to pay taxes on his profit.

I don’t necessarily subscribe to this concept, because another aspect of the American way is to avoid taxes as much as legally possible. After all, Congress created the tax laws — with all its loopholes and perks — and every homeowner should be able to take advantage of that law.

This is not your principal residence, so you would not be eligible for the up-to-$500,000 exclusion of gain. However, should you decide to move into the property, you should add your spouse to the title. You can exclude up to that $500,000 ceiling if (1) either spouse meets the two-year ownership test, (2) both spouses meet the two-year use test (i.e. you both have to live there for at least two years, and (3) these two tests must have been met within the five years before the property is sold.

NOTE: The recently enacted housing bill, HR 3221, restricts (for sales beginning Jan. 1, 2009) the gain exclusion for the period of time that the property was rented. If you plan to sell after Dec. 31, 2008, you must consult with your tax advisors.

If, on the other hand, you do not want to live there for at least two years, you have limited alternatives. You can do a 1031 (Starker) exchange, and swap the property for another investment property. This will not avoid the tax, but only postpone it for a future day.

You can sell the house and take back financing. This also will not avoid the tax, but it is known as an "installment sale," which means that you will pay tax on a yearly basis only on any principal you receive during that year.

Or you can wait until you die, so that your heirs can get the stepped-up basis. Or you can be happy with your profit, bite the bullet and pay the tax.

DEAR BENNY: What can I do to help my senior grandparents clear the title of their property from a construction company that never did the work on the property? –Sheila

DEAR SHEILA: If I understand your question, your grandparents contracted with a company who never did the work, but they filed a mechanic’s lien, which has become a problem — a cloud — on their title. Each state has different rules about mechanic’s liens. For example, here in the District of Columbia, if such a lien is filed against property, the person filing the lien must file a suit within a statutory period of time or the lien will no longer have any legal effect on the property.

I suggest that you consult with a local attorney who can advise you the proper procedure. It may very well be that you need not take any action at all, as the lien (while still on the books) may no longer have any validity.

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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