Real Estate Mailbag

By Robert J. Bruss
Saturday, February 18, 2006; G02

Q: DEAR BOB: If I move for 24 months into a rental house I've owned for 15 years, can I then sell it as my principal residence to avoid the recapture tax on all the depreciation I've deducted?

-- Elinor W.

A: DEAR ELINOR: Sorry. The only way to avoid the dreaded federal depreciation recapture tax is to make a tax-deferred exchange for a qualifying replacement investment or business property of equal or greater cost and equity.

Converting a rental house into your principal residence will avoid capital gain tax on up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return). However, the portion of your capital gain that is attributed to the depreciation you deducted during your ownership years remains taxable at the special 25 percent federal recapture tax rate when you sell the property. For details, consult a tax adviser.

DEAR BOB: I live in a community with a homeowners association protective covenant. It says "campers" may not be parked on the homeowner's property or on the street. The street is public. There are no restrictive entry gates. There are no city restrictions on parking on my street. Do you think I can legally park my "camper van" on the street and win the issue in court? -- Mel F.

DEAR MEL: Are you 100 percent certain the street in front of your house has been deeded or dedicated to the city? If it has, then the homeowners association cannot prohibit you from parking your camper van on the street.

However, if the city does not "own" the street, even though it is open to the public, the homeowners association is responsible for its maintenance. That means they can impose the rules.

I'm sure you don't want your neighborhood homes to decline in value by having lots of ugly campers parked in driveways and on the street.

When you bought your home, you agreed to abide by the CC&Rs (covenants, conditions and restrictions). Find a nearby storage facility to park your camper. That will probably be much cheaper than paying fines and possibly being taken to court by your homeowners association. For details, consult a local real estate lawyer.

DEAR BOB: Can I include a clause in my rental agreement for a house prohibiting smoking? -- Winston R.

DEAR WINSTON: I am not aware of any state law that says a landlord cannot prohibit smoking in a rental house or apartment. However, you have no legal right to enter the property to enforce such a restriction except upon reasonable notice that, in most states, is interpreted as at least 24 hours' notice. For details, consult a local landlord-tenant lawyer.

DEAR BOB: Please explain the pros and cons of a land contract home sale. -- Dan McF.

DEAR DAN: I do not recommend land contracts, also known as contracts for deed, installment sales contracts, agreements for sale and a zillion other names.

The basic land contract concept is that the seller retains title and the buyer makes monthly payments to the seller. If there is an existing mortgage, the seller uses part of the buyer's payments to pay the mortgage payments.

As a buyer, after you faithfully make all your monthly payments to the seller on time, you could find the seller is unable to deliver marketable title. Or, maybe the seller failed to keep up payments on the underlying mortgage(s) and the lender foreclosed, wiping out your land contract purchase.

Or, if the buyer defaults, in many states a court action is required for the seller to get the defaulting buyer out of the property.

However, when a land contract seller defaults and is unable to deliver marketable title to the buyer, the buyer's only recourse is to sue the seller for damages. For details, consult a local real estate lawyer.

DEAR BOB: About four years ago, three of my college fraternity brothers and I bought a vacation home as tenants-in-common. We all have good jobs, pay our share of the expenses and get along great. Everything worked out well until one co-owner got married about a year ago. We liked his new wife very much until she started demanding a share of the vacation cabin. Her husband quitclaimed to her a 1/8 share and he kept a 1/8 share. But now she wants to force a sale of the vacation home because it has greatly appreciated in market value. Oh, I forgot to tell you, she is a lawyer. She says she will be satisfied if we three remaining co-owners buy out the one-fourth interest of her husband and herself. Can she force us to buy her out? -- Devon H.

DEAR DEVON: Your situation is a classic example why, instead of taking title as tenants-in-common, you four original co-owners should have formed a partnership so a written agreement could provide for situations such as you describe.

Unfortunately for you and the others, any co-owner can bring a partition lawsuit to force the sale of the property. Majority rule does not apply.

If the three remaining co-owners want to keep the vacation home, I suggest you hire an appraiser to determine its fair market value, and then negotiate a buyout of the troublesome co-owners. For more details, consult a local real estate lawyer.

DEAR BOB: I own a condo in a 26-unit condo complex. Our board of directors is out of control. The building is managed by the homeowners association president, who controls the checkbook. He pays himself various fees, and the treasurer goes along because she is his wife. Unfortunately, they own six of the 26 units. Many owners don't live in the building so they don't care how corrupt the operation has become. At the last annual meeting, only 11 owners showed up. But there was a quorum because of proxies given to the association president. What can we do about an out-of-control situation like this? -- Vern W.

DEAR VERN: The best solution is to get the absentee owners to participate and vote to elect a new group of directors at the next annual meeting. You may want to consult a lawyer who specializes in condominium law, but a lawsuit could be a costly waste of money. Sorry, there is no easy solution to your problem.

DEAR BOB: My fiance and I built our home about a year ago. He has since changed jobs and moved to Arizona. I am still living in our house. We are not married, but we own the house 50/50. He wants to sell it. The market value has greatly appreciated because it is a one-of-a-kind custom home on a beautiful lot. I can't afford to live in it alone and wait another year for that $250,000 tax exemption, which requires two years of owner occupancy. But I hate the thought of paying capital gains tax. What should I do? -- Deborah E.

DEAR DEBORAH: You, but not your fiance, may be eligible for a partial $250,000 principal-residence-sale tax exemption due to "unexpected circumstances" as allowed by Internal Revenue Code 121, even though you did not meet the minimum 24-month ownership and occupancy test.

If I understand your e-mail correctly, you alone have lived in the house since its completion about 12 months ago. You can probably qualify for a financial hardship exception to IRC 121, allowing you to claim up to $125,000 tax-free capital gains for your share of the profits.

But your fiance can't qualify for any tax exemption since he didn't live in the house. That means he pays capital gains tax on his profit share without any exemption. For details, consult a tax adviser.

DEAR BOB: The house next to mine has been vacant since June 2005. It is very run-down. The owner has been cited for building code violations, such as making additions without building permits. He has a long history of not making necessary repairs. Now he is considering tearing down the house and garages to sell as a vacant lot. We have one common wall and a common fence. We have both owned our properties since the 1970s. I paid for the common fence. What can I do to protect myself and be sure I get a fair settlement? -- Shulamith B.

DEAR SHULAMITH: From your description, it seems you just need to be sure your neighbor doesn't damage your common wall or the common fence if he demolishes his house and garages. You should contact the appropriate city department that could issue a demolition permit to be certain you are notified in advance.

As for getting a "fair settlement," you are not entitled to any compensation, presuming the neighbor's demolition doesn't damage your common wall or fence.

DEAR BOB: About five years ago, an "estate planning attorney" talked us into putting our house into an irrevocable trust for various reasons. Now we need to sell our house because of health and financial reasons. However, the lawyer who created our irrevocable trust has died and we don't know what to do. Any suggestions?

-- Ted D.

DEAR TED: Your situation is a classic example why it is usually not wise to create an irrevocable trust. Your only alternative is to consult another lawyer to review your situation to investigate if there is any possibility of terminating your irrevocable trust. If you have received benefits, especially tax benefits, it may be virtually impossible to terminate the trust.