DEAR BENNY: My husband and I have a house entitled in joint tenancy, and I am filing a divorce. I left our house about two months ago. In less than two years my spouse will retire and that will give him time to sell the house.
For his convenience, I am planning to have as part of the divorce decree that the house be sold in no later than two years. My spouse can afford to pay the mortgage if he wants to stay through that period of time. We have no kids from our marriage, but I have two grown-up, married kids on their own already.
Will that be acceptable to the mortgage lender? Will this be a disadvantage to me? I am sorry if this last question is one that I should direct to a divorce attorney. –C.S.
DEAR C.S.: By all means, you have retained legal counsel and the specific advice you need should come from him or her. You have raised two questions: (1) Will the mortgage lender have any problems with your proposal? The short answer is no. So long as your ex-husband pays the mortgage, the lender will be happy.
(2) Will there be taxable consequences? From your question, I must assume that you will not transfer the house to your husband pursuant to the divorce decree, but, although you will move out of the property, you will both agree to sell it within two years.
In order to take advantage of the up-to-$250,000 exclusion of gain, the Internal Revenue Service looks to the use and ownership test. You have to have owned and used (i.e., lived) in the house for two out of the five years before it is sold.
However, according to the IRS, "If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it."
Additionally, "you are considered to have used property as your main home during any period when you owned it, and your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home." (See IRS Publication 523, "Selling Your Home," available from www.irs.gov.)
So, although you should confirm your situation with your divorce attorney, my reading of the law is that you and your ex would be able to sell the house and both of you would be eligible for the up-to-$250,000 exclusion of any profit you will make.
Keep in mind, however, that this does not mean you can exclude all of the $250,000; it allows you only to exclude that much of your profit, subject to the cap of $250,000.
However, to be completely safe, I would insist that the house be sold no later than two years after you have left the house. Another IRS publication you should look at is 504, entitled "Divorced or Separated Individuals."
DEAR BENNY: We have a big problem with one of our absentee homeowners who lives out of state and is an attorney. We recently reworked our covenants as homeowners after the developer turned over the property to us. Basically, all we did was take out the word "developer" and inserted "the homeowners association."
We sent out ballots to all the homeowners, which had a seal on it (notarized impression) as well as a return envelope with a code on it to prove it was an original ballot. Well, the attorney is challenging the favorable vote based upon the fact that the ballot didn’t require a signature. –Norm
DEAR NORM: Does your association have an attorney? Presumably, the lawyer assisted you (or should have) in preparing the amendment to your covenants.
Every community association has legal documents. In a condominium, they are usually called the declaration and the bylaws. In a homeowners association, they are called covenants, conditions and restrictions (or CC&Rs). In cooperative housing, co-op owners rely on the articles of incorporation and bylaws.
Each of these documents will contain language as to how they can be amended. While I can’t give you specific legal advice, in my opinion, the other attorney’s position makes no sense.
If you followed the legal procedures for amending your documents, what difference does it make if there are or aren’t signatures on the ballot? Actually, the signatures help you in determining the validity of the owner who submitted the ballot.
DEAR BENNY: Regarding timeshare owners, let’s say they owe $45,000 and association dues are $1,000 a year. You have advised they could donate it to several organizations. How do you donate an obligation (mortgage) to anyone? Owning it debt-free and "donating" it makes sense, but not donating it when you owe $45,000.
Incidentally, I own four timeshares, which I bought on the secondary market for as little as $100, and not more than $1,500 each. They are a great deal if you use or trade them. I agree that buying timeshares from developers is almost always a stupid action, but there are many good things about timeshares.
By trading timeshares through one of the timeshare programs, I have had many weeks in different places. I am not a time share salesman or the representative of any developer. The best source for cheap timeshares is from timeshare homeowners associations where owners have stopped paying their monthly fees and deed the units back to them. Another simple way is a classified ad in the local paper offering to donate a timeshare. –Tom
DEAR TOM: You are correct that it will be difficult to donate a timeshare that has an underlying mortgage. Actually, from my readers who currently own timeshares, I have been learning that it is difficult to get rid of one regardless of whether there is a mortgage.
You have been lucky with your purchase, and I know that there are many happy timeshare owners. However, I believe you are in the minority; most of my readers are very unhappy and are desperate to rid themselves of that financial burden.
My advice if you happen to have an interest in buying a timeshare: Don’t fall for the representations of the smooth-talking salesman. Get a copy of all documents that you will have to sign and have them carefully reviewed by your attorney.
If the salesman says you can’t take the documents with you (as happened to me once when I was doing some hands-on research in this area), just say "thank you" and walk away.
DEAR BENNY: In a recent column, you answered a question from a woman who needed to find affordable housing. I suggest that she contact her local Habitat for Humanity organization. They will work with her and her fiancée to build a home for her that is handicapped accessible.
Yes, she will have to put in some "sweat" equity, but it doesn’t have to be "hammer and nails" type of work. Habitat will allow both of them to work on fundraising projects like bake sales or social events, etc. –Norm
DEAR NORM: Thank you for writing and for your suggestion. I cannot (and will not) endorse any particular organization, since there are many such programs out there that assist people with housing needs. You have mentioned Habitat for Humanity, and I will let my readers do their own research and make up their own mind as to whether that program fits their individual needs.
DEAR BENNY: If a new appraisal of real estate is done at the time of the death of one of the owners, my husband, will that give a stepped-up basis for computation of capital gains taxes rather than the original purchase price when the property is eventually sold? Our house has more than doubled in value since we first bought it. –Billie
DEAR BILLIE: Congress is currently struggling with major tax issues, one of which involves the "stepped-up" tax basis. Basis is generally the price you paid for the house. To determine your profit (called "gain"), you take your basis, and add any major improvements you made over the years. That is called the adjusted basis.
You take your sales price, deduct such things as real estate commissions, and get the adjusted sales price. Your gain is the difference between the adjusted sales price and the adjusted basis.
Up until the end of 2009, the tax law said that on the death of a property owner, the basis of the inherited property was its value as of the date of death. In other words, the basis was "stepped-up." However, for year 2010, this "step-up" is not applicable.
Instead, heirs assume (or carry over) the basis of the deceased owner, but can elect to increase that basis up to $1.3 million. In your case, since you would be a surviving spouse, the basis can be increased by an additional $3 million.
This really does not impact middle-class Americans, unless your house is extremely valuable. But depending on what Congress does this year, the old stepped-up basis should be back on the books in 2011.