DEAR BENNY: I was told by a prominent accountant that there is a loophole in the law that states that you can be exempt from paying capital gains (if you are in a home less than the two-year period) if there are "unforeseen circumstances" involved. Are you aware of this? Can you doublecheck to make sure? This accountant is well trusted by a lot of businesspeople! At the time I was going through an "unforeseen" divorce. –Patricia
DEAR PATRICIA: In general, in order to take advantage of the up-to-$500,000 exclusion of gain ($250,000 if you file a separate tax return), you have to own and live in the house for two out of the five years before it is sold. However, the law does allow a partial exclusion under certain circumstances. There are three "safe harbors" (meaning that if you meet these tests the IRS will not challenge you): (1) change in employment; (2) health; and (3) unforeseen circumstances. In this third category, if you could not have anticipated an event before you purchased your house, you may also be able to claim a partial exclusion. While this is fact-specific — and in many cases you will have to get a special ruling from the IRS — there also are some safe harbors that the IRS will recognize. These include: an involuntary conversion of your house; natural or manmade disasters resulting in a casualty to your home; divorce or legal separation; and multiple births resulting from the same pregnancy.
It would appear that you may qualify based on your divorce. The exclusion is equal to the number of days of use times the quotient of $500,000 divided by 730 days. Note that 730 days is two full years. If you are single — or do not file a joint tax return — change the $500,000 to $250,000.
Your accountant knows what he is talking about so you should ask him to do the calculations. However, I do not think he said that you can escape all capital gains tax.
DEAR BENNY: What happens to any additional money in a foreclosure action if the highest bidder pays more for the house than the amount that the bank is owed? Is the money given to the person who was foreclosed upon, or does it go to the county or state? –Monique
DEAR MONIQUE: It is a rare case that there is any money left over after a foreclosure sale. The lender, their attorneys and the auctioneer (including advertising costs) will get paid out of the price that the property is sold at the sale. The professionals who buy at foreclosure sales will generally want a good deal and will not bid much higher than the initial bid price set by the lender.
And in many cases, there is no buyer, and the lender ends up owning the property.
However, if there is a surplus, the money goes back to the person whose home has been foreclosed upon.
DEAR BENNY: The neighborhood that I live in is going downhill, with a couple of empty houses on my street that look like they may be foreclosures or REOs, and there are also several others for sale. And to make it worse I will have negative equity in my property and probably need to do a short sale. I have both a first and second mortgage (HELOC), but from two different mortgage companies. What steps do I need to take to find a Realtor that handles this, and will having a second mortgage be a problem in respect to the short sale? –Pam
DEAR PAM: The first thing I would do is talk with your lenders. Because there are so many foreclosures taking place all over this country, many lenders would prefer to work with you to possibly reduce your mortgage interest rate rather than have another house in foreclosure.
Additionally, there are many government and private programs available (or soon to be available) to assist people in financial difficulty.
But a short sale will be difficult unless you can reach an amicable arrangement with the holder of the second trust.
DEAR BENNY: Do you know of any books or brochures that help explain the responsibilities of a condominium developer/owner? We live in an unfinished condo development in St. Louis. There are construction and maintenance issues that the current residents believe are the responsibility of the owner/developer, not the condo association. The items/issues are not covered in the bylaws. –Natalie
DEAR NATALIE: There is an organization in Virginia known as the Community Associations Institute. You can find them on the Web at caionline.org. This group has a number of valuable resources that may be helpful to you, including books and publications on a number of community association subjects as well as suggested names of attorneys who may be of assistance in helping you learn your rights.
DEAR BENNY: I recently purchased a home and directly next to it is a piece of railroad property that separates it and two other properties. All properties have access to the streets. The railroad took the land by eminent domain many years ago, and the prior owners are now long gone. When I contacted the railroad about purchasing the land they said because they took it they cannot sell it but would be willing to abandon it for a small fee. If I pay this fee how do I get title to this land? It does appear that they took a portion of the lot I already purchased and they said so to me. How do I keep someone else from getting it once abandoned? Also, the portion they took (of my lot) was already being used as a driveway by my lot for at least the last 30 years that I know of, and the other lots appear to also have been abandoned years ago. –Robert
DEAR ROBERT: This is a complicated legal issue and you should retain an attorney versed in real estate to assist you. I do not know why they can’t just sell you the land, and you should ask them for an explanation.
If the property has been abandoned, you may have the right to file a lawsuit claiming adverse possession. This means that you (or your predecessor) have, for the period of years authorized by your state statute, openly, notoriously and hostilely used the property. As I stated, these are technical legal issues, which must be reviewed by your attorney.
If, in fact, the railroad company is willing to state in writing that they have abandoned the property, you may also be able to file what is known as a "quiet title" action, asking a judge to review the facts and determine who owns the property.
DEAR BENNY: I have just found out that my neighbor’s septic tank leach line and leach pit is on my property. I was going to buy the property when it was recently up for sale, but I was not given the chance. I did file a lawsuit against the seller. The contract purchaser has not yet taken title to the property. Do I have a legal claim against not just the seller but the buyer if he does indeed go to closing and take possession of the property? I am hoping that after the buyer learns that there is a lawsuit on the property, he will back off and not buy it. What happens in a case like this? –Leo
DEAR LEO: You have filed a lawsuit that should put the title (escrow) company on notice. You or your attorney should contact both the title company as well as the buyer and advise them of the lawsuit. There is a concept in law called "lis pendens," meaning that litigation is pending. Ask your attorney if he is able to file this lis pendens document in your case and have it recorded among the land records on your neighbor’s property. Clearly, the title (escrow) company will see that there is a pending lawsuit when it searches the title for the buyer.
The buyer would be foolish to buy the property until your lawsuit is resolved.
I would also try to reach an amicable arrangement with the buyer. After all, if he does buy the property, he will be your next-door neighbor.
DEAR BENNY: How can I get a title company to release funds being held in an escrow account for a unreleased deed of trust for a loan 20 years ago from a bank that no longer exists? –C.R.
DEAR C.R.: State law differs on how old a deed of trust (mortgage) has to be before it will no longer have any force and effect. Are you sure that the title company still holds the funds in escrow and is still in existence?
If you are sure that the money is still there, you can file a suit for quiet title, asking the judge to cancel the note and deed of trust and order the release of the escrowed funds. However, the judge will carefully review the facts to make a decision as to who is the rightful owner of these escrowed funds.
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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