DEAR BENNY: A real estate developer planned to build an upscale 48-unit townhouse development. The design work was completed, a general contractor was hired, and construction work began. Four models were built and furnished, a sales office was set up, and sales began. The first two units were sold, and the new owners moved in. However, even 12 months after the first units were sold, only two of the units were occupied.

Then the developer and general contractor became involved in a dispute. The project has stopped for six months and it looks like it might not get under way again. The arbitration process that’s now under way between the developer and the contractor is moving very slowly.

What are the alternatives available to me, one of the two homeowners? It’s unlikely I can sell my unit to someone else with the entire project in such an unfinished state. If I could, it would probably be at a considerable loss.

DEAR BENNY: A real estate developer planned to build an upscale 48-unit townhouse development. The design work was completed, a general contractor was hired, and construction work began.

Four models were built and furnished, a sales office was set up, and sales began. The first two units were sold, and the new owners moved in. However, even 12 months after the first units were sold, only two of the units were occupied.

Then the developer and general contractor became involved in a dispute. The project has stopped for six months and it looks like it might not get under way again. The arbitration process that’s now under way between the developer and the contractor is moving very slowly.

What are the alternatives available to me, one of the two homeowners? It’s unlikely I can sell my unit to someone else with the entire project in such an unfinished state. If I could, it would probably be at a considerable loss.

Could the developer be obligated or required by law to buy back the two finished units if the development doesn’t get under way again within a reasonable length of time? Is there a government agency or an individual who could exert some pressure on the developer and contractor to resolve their dispute and get the project moving again?

Could a real estate lawyer provide some meaningful choices for action? I’m not looking for an expensive court case to help resolve the problem. Are there any other alternatives that I’m not seeing? –Dale

DEAR DALE: Yes, you and the other owner have a large investment at stake and you both should retain a real estate attorney in your area.

In general terms, the developer is either obligated to make the association fees for the units he still owns or at the very least should be obligated to pay all expenses of the association, less the contributions that you two owners have to make. The specific answer to this question will be found in your legal documents, which the attorney can read and give you advice on.

The more basic question, however, is what, if anything, can you do to get the complex finished? That’s a real problem. It is possible that the developer — even if he resolves his dispute with the contractor — does not have any more money. My concern is that the bank may ultimately foreclose on the project, and who knows what they will do if no one buys at the auction sale?

You or your attorney should at the very least talk with the developer and the developer’s bank. If the project had been completed, at least the houses could be sold or rented. But if they are not yet built, you have a real problem.

You can try to get the developer to buy back your houses, but as indicated, he probably does not have the money. You should also talk with the bank that lent you the money to buy the property. They will take the position that this is not their concern, as you owe them money and they expect prompt monthly payments.

You should also talk with the attorney general’s office in your state. I am not sure what they can do, but perhaps they have some proposals that could assist you. I know this answer will not be satisfactory to you. But, and it will not be any consolation, you are not alone. This is a nationwide problem.

DEAR BENNY: My wife and I have jointly owned two homes (one for 15-plus years and one for 34-plus years), traveling back and forth between them. One home is in one state where I am resident (established voting, driver’s license, bank accounts, local community involvement, notarized letter of intent to maintain residency, etc.). Our other home is in another state where my wife similarly retains her residency.

We typically each spend slightly over six months each calendar year in the home in our own state of residency, then spend the remainder of the year in the other home. Over the past 60 months, we have each spent more than 24 months in both houses.

Being retired, we may now want to sell one of the houses. Either house, if sold, would likely have a capital gain of over $250,000 but less than $500,000.

The obvious question is: Can we claim the $500,000 capital gains exclusion for a married couple? We do, in fact, live in both houses for more than 24 months out of each preceding five years. While at each house, it seems to me that it becomes the "main home" for both of us (for mail and newspaper delivery, telephone and trash service, shopping, entertaining families and friends, doctor’s appointments, etc.).

It seems to me that we ought to be able to claim the $500,000 exemption on the sale of either house. Of course, we could not then claim it again for at least two years. What do you think? –Richard

DEAR RICHARD: If you sell your principal residence (which the IRS calls "your main home"), and if you have lived in and owned the house for two out of the five years before it is sold, you are eligible to exclude some or all of the profit you have made since you first bought the house. If you are married and file a joint tax return, you can exclude up to $500,000 of this gain. If you are single (or file a separate income tax return), you can exclude up to $250,000 of your gain.

Living and owning are technically called the "ownership and use" test.

You have indicated that you and your wife both own the two properties, and that you live in one of the houses for a little more than half a year. According to the IRS, "If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time."

So, it would be my opinion that you and your wife are able to take the up-to-$500,000 exclusion on that home. Note that this does not mean you can exclude $500,000; if your profit is only $300,000, that is all that you can exclude. And if your profit is $600,000, you would have to pay capital gains tax on the $100,000 difference.

Should the IRS audit you, the burden to prove ownership and use falls on you and your wife. Ownership is relatively easy; get a copy of the original deed when you bought the property; many jurisdictions allow online access to such records. Otherwise, you may have to make a trip to the local recorder of deeds.

However, meeting the "use" test requires some effort on your part. Again, according to the Internal Revenue Service, the address of the house you are claiming as your "main home" should be on (1) your federal and state income tax returns; (2) your driver’s license; (3) your car registration and (4) your voter registration card.

But since you and your wife live in two houses each year, you will have to provide the IRS proof that you have lived in one of them more than six months each year. How do you do this? In my opinion, utility bills are your best evidence. Clearly, your gas, electric, telephone and water bills will be higher in your main home.

Now that you have met the tests for your main home, what can you do about the second one? If you move in (i.e., live) and own that second property for at least two years, you are once again eligible for the gain exclusion. But as of Jan. 1, 2009, a new law created a complex allocation. You should discuss this with your own tax adviser.

Bottom line: The exclusion is not a one-time thing. You can claim it every two years, providing of course that you meet the two tests.

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