DEAR BENNY: I live in a 12-unit condominium complex. We self-manage. One of the units will probably be going into foreclosure in the very near future. What does the complex need to do to collect the monthly dues and yearly assessments once the unit is in foreclosure? –Sara
DEAR SARA: Unfortunately, this is a very common problem that many condominium associations throughout the country are facing. It has a downhill spiraling effect: When a unit owner is delinquent on his/her mortgage payments, that owner doesn’t pay the condominium fees either.
The first thing you should do is to consult an attorney in your area who understands community association law. There are to my knowledge some 12 states in the country that make the condominium assessment a priority lien. For example, in the District of Columbia where I practice, when a lender forecloses on a unit, up to six months of back condominium fees must be paid when either the bank or a third-party buyer at the foreclosure sale takes title.
If you are in one of those "super-priority" states, you or your attorney should put the foreclosing lender on notice of this law.
And regardless of whether this law exists in your state, you have to carefully monitor the status of the foreclosure sale. Just as soon as title passes — either to the bank or to a third party — the new owner becomes a unit owner, and is legally obligated to pay all future condominium fees.
Actually, as harsh as it may sound, if a unit owner is in deep trouble and facing foreclosure, you want the sale to take place as quickly as possible. The longer the process takes, the more money your association will be losing if the delinquent owner is not paying the monthly condo fees.
DEAR BENNY: In April 2005 we bought a lot in Missouri and received a general warranty deed a month later. The deed described the lot and its conveyance to us as husband and wife. Shortly thereafter, we began construction of a house. The house was completed in February 2006 and we began residing there at that time. We own the lot and house with no mortgage.
The deed has not been changed to include the improvements, and there is no wording such as "joint tenants" or "right to survivorship."
Your recent Mailbag article regarding the importance of this kind of wording has made me question whether we have what is necessary to describe ownership of both lot and house as well as protection of the surviving spouse’s rights. –Ed
DEAR ED: You raise a two-part question. First, the 2005 deed that you received conveyed the property to you and your wife. The fact that you constructed a house on the vacant lot does not change the fact that both of you own the property. I would not worry about that. I don’t know Missouri law. You have to confer with a local attorney to make sure that your deed is properly worded. In many states, husband and wife take title as "tenants by the entirety," which is a form of title reserved exclusively for married people. Such a deed has the same effect as a deed that is held as "joint tenants," but actually gives the husband and wife more protections.
But your state may take the position that the mere words "husband and wife" is sufficient. Not all states use the concept of tenants by the entireties.
DEAR BENNY: Can you please define "capital gain"? You mentioned the term in one of your previous articles, but I did not quite understand how it would benefit me. My husband passed away five years ago and I am ready to sell our home and downsize to a smaller one. The house is 30 years old and the mortgage was paid off two years ago. I would appreciate any information you could give me on the subject. –Linnie
DEAR LINNIE: Capital gain is the profit you have made on your house. You take your original purchase price, add to it the cost of any improvements you may have made, and you add certain expenses that you paid when you first went to closing (escrow). These expenses can be found in IRS Publication 523, entitled "Selling Your Home," which can be downloaded from www.irs.gov, and click on Publications. This is called the "tax basis" of your house.
Then you take the selling price of your house, and deduct any real estate commission you may have paid, as well as other expenses such as advertising, legal fees associated solely with the selling of the house, and any loan charges you may have paid for your buyer. This is the adjusted selling cost.
To get your gain you subtract your tax basis from the adjusted selling cost.
This is a very oversimplified explanation. I have not discussed your situation about where your husband died, because you will get a stepped-up basis that will differ depending on where you live.
Furthermore, I have not discussed the up-to-$500,000 exclusion of gain (up to $250,000 in your case because you cannot file a joint tax return) that you can take if you have owned and used the house for two out of the five years prior to its sale.
You should carefully review the IRS publication, and if you still have specific questions, talk with your own tax and legal advisors.
DEAR BENNY: I want to buy my brother’s home (essentially for the amount of the mortgage), which I would allow my brother to continue to live in, and which I would use as a second (vacation) home. When my brother leaves the house (death, nursing home, etc.), I plan to sell the house and use the IRS $250,000 capital gain exclusion (assuming at least two years of ownership). Are there any potential problems with this plan? Would it be wise to place the house in a trust? –Frank
DEAR FRANK: You have to talk with your attorney as to whether to put the house in trust. There are many variables, which are individual and possibly unique to your situation, so I don’t believe it would be appropriate to give you advice on this issue.
I see no real problems with your proposed plan. However, you should know that the new Housing and Economic Recovery Act of 2008, signed into law by President Bush on July 30, 2008, puts some restrictions on your ability to claim the full $250,000 exclusion of gain.
This is complicated, but suffice it to say, if you sell a second home (whether it be a rental property, a vacation home or the type you are describing) the exclusion will be allocated between the time you owned the property and the time that you actually lived in it. In simple terms, the period of time you used the property as your principal residence will be eligible for the gain exclusion; the time that it was not your principal residence may be taxed.
There is a formula to determine your taxable situation: The numerator is the amount of time (after Jan. 1, 2009) that the property was not your principal residence, and the denominator is the total amount of time of ownership from when you first bought the property.
DEAR BENNY: My wife and I are considering renting our current primary residence for a short time after we build a new house with the idea of letting the housing market stabilize before we sell our current home. What are the tax rules regarding renting a primary residence and still counting it as a primary residence when sold? –Michael
DEAR MICHAEL: Good suggestion, and hopefully that stabilization will occur quickly.
In order to be eligible for the up-to-$500,000 exclusion of gain ($250,000 if you are single or do not file a joint tax return), you have to own and use (live in) the property for two out of the previous five years before the house is sold. In your example, if you already have owned and lived in the house for at least two years, you can rent it out for one day less than three more years.
Be careful, however. If you rent out your house, will potential buyers be interested in buying when there are tenants? Will you be able to get the tenants out of the property in time to sell before the three years are up? Perhaps an investor can be found to buy and let the tenants stay in the house, but you cannot count on finding such a buyer.
If you decide to rent, my suggestion is to make sure that the lease completely expires in two years. This will give you one full year in which to find a buyer. Otherwise, you will have to pay capital gains tax on any profit you make, unless you either hang on to the house as a long-term investment or do a 1031 (Starker) exchange.
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 email@example.com.
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