DEAR BENNY: I live in a condominium with 100-plus units. Our board recently adopted a rule that basically states that before any unit can be sold, the board has to receive and approve a copy of the sales contract as well as the financial information of any potential purchaser. Is this legal? –Carla

DEAR CARLA: Whenever I receive a question about the legality of something that occurs in a community association, whether that be a condominium, a homeowners association or a cooperative, the first thing I have to do is to look at the operative state law.

Many states have enacted the Uniform Common Interest Ownership Act (UCIOA), which governs and controls all community associations in that state. For example, in UCIOA, there is a requirement that the declaration of the association must contain language regarding "any restrictions (1) on use, occupancy and alienation of the units, and (2) on the amount for which a unit must be sold or on the amount that may be received by a unit owner on sale, condemnation or casualty loss …"

The declaration is the principal document that creates the community association. For homeowners associations, it is usually referred to as the CC&Rs (covenants, conditions and restrictions); in a cooperative, it is the articles of incorporation.

If the language quoted above is not found in the declaration, then the board cannot under any circumstances enact such a rule.

Note the word "alienation." There is a legal concept called "restraint on alienation." Basically this means that "your home is your castle" and with few exceptions you have the right to sell, or alienate, it to whomever you want.

In cooperative housing, however, it is customary for such language to appear. Co-op members have the right to exclude a potential owner, but the right is limited. Unfortunately, all too often potential owners are rejected not because of financial reasons, but for discriminatory reasons such as age, race, color or sexual orientation.

Bottom line: In my opinion, the board rule must be challenged and thrown out. It is an open invitation for board members to arbitrarily refuse a potential purchaser and/or to pry into the private financial situation of that person.

Some associations have a right of first refusal. If the board does not like the purchaser and rejects the sale, then the association must buy the property at the same contract purchase price.

While I don’t like this concept either, at least it does not hurt an owner who wants to sell his or her property, especially in today’s economic situation.

DEAR BENNY: Your recent article about the man who wanted to gift his house to a friend raised a question in my mind. Suppose the house received a stepped-up basis after the man’s wife died. If he then gifts the house to the friend, does the friend receive the stepped-up basis as his tax basis, and does the man have to deduct the stepped-up basis from his lifetime exclusion? –Bob

DEAR BOB: First, this year there really is no step-up in basis. Let me first explain what that was.

Example: A husband and wife bought property many years ago for $50,000. The husband dies, and the value of the property at the time of death was $400,000. Assume there were no improvements. The basis for tax purposes for each spouse was $25,000 each. But on the husband’s death, half of the fair market value — namely $200,000 — is added (i.e., stepped up) to the wife’s tax basis, and now her basis is $225,000.

However, for 2010, Congress repealed this concept and substituted what tax attorneys are calling a "modified carry-over basis." Oversimplified, in our example, the new basis for the wife would be the lesser of the husband’s adjusted basis or the fair market value of the property at the time of death. In other words: only $25,000 would be added to the wife’s basis, which would then become only $50,000.

It should be noted that even this has a limitation. Under no circumstances can the basis be more than $1.3 million — but if the property was passed to the surviving spouse, it can be increased by an additional $3 million. There is movement in Congress to amend the law, but don’t hold your breath in a controversial election year. Hopefully, the stepped-up basis will return in 2011.

But to answer your specific question: Assuming a stepped-up basis exists, the husband would get that benefit. If he then gifts the property to a friend, that friend takes advantage of the new tax basis. General rule: The basis of the giver of the gift (the donor) becomes the basis of the receiver (the donee).

And the donor would have to report to the IRS the amount of the gift, less $13,000, which is free from gift tax. This would be deducted from his lifetime gift allowance.

(NOTE: The laws may differ in community property states, and readers should consult with their legal and financial advisers about their specific situation.)

DEAR BENNY: I recently purchased a house in Florida, and would like to establish the house as my permanent residence. I also own a condo in California, and am currently a California resident. What do I need to do to change my residence state from California to Florida to satisfy the IRS and to qualify for the $250,000 exclusion of gain each for my wife and me should we opt to sell the Florida property after two years? –Jack

DEAR JACK: There is no formal definition of "principal residence." The test that the Internal Revenue Service uses is called the "facts and circumstances" rule; in other words, the IRS looks to each individual situation to determine whether the property each owner lives in is really their true "home."

In order to take advantage of the up-to-$500,000 exclusion of gain for married couples who file a joint tax return (or up-to-$250,000 if you are single), there is yet another test. This one is called the "ownership and use" test. To qualify for the gain exclusion, you must have "owned" the house and "used" it for two out of the last five years before it is sold.

Proving the ownership test is relatively simple. If you and your wife were on title to the house for at least two years, you get an "A" on this test. Of course, there are a lot of variables, such as divorce, remarriage, etc. This is a topic for another column.

Meeting the use test may be more difficult. Clearly, if you and your wife have lived in the house for many years, you will also get an "A." But in your case, you have just moved from coast to coast.

Here’s my suggestion: Get a driver’s license in Florida. Register to vote and start paying appropriate state and local taxes in Florida. Make sure that all utility bills are sent to the new Florida address, including any bills you may have to pay for the California condominium.

If you follow these suggestions, and should you be audited by the IRS, I believe that the "facts and circumstances," which you will be able to prove, will allow you to qualify for the use test.

DEAR BENNY: What is the difference between a mortgage and a deed of trust? –Krista

DEAR KRISTA: In practical terms, there really is no difference. You borrow money from a lender, and sign a promissory note. But the lender wants security (collateral) in case you cannot meet the monthly payments. A mortgage is one way to secure the property; the mortgage is recorded among the land records in the jurisdiction where your property is located, and puts the world on notice that there is a lien on the property.

Basically, a deed of trust accomplishes the same purpose. The main distinction, however, is that generally, in order for a lender to foreclose on a mortgage, it has to obtain court approval.

With a deed of trust, on the other hand, you — the borrower — have deeded over your property to a trustee (or trustees) who is selected by the lender. If you are in default, the deed of trust gives the trustees the power (the right) to sell your house at a foreclosure sale.

Some states require judicial foreclosure even with deeds of trusts.

Bottom line: If you have signed a deed of trust, the only time you want to hear from the trustees is when you sell (or refinance) your house and need the trustees to release their lien from land records.

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