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A warning about unpaid real estate taxes

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POSTED October 7, 2011 1:01 a.m.

DEAR BENNY: Subsequent to the purchase/settlement of my condo, I began receiving claims of delinquent real estate taxes that the seller had neglected to pay from a previous year, prior to my purchase of the property. I notified my settlement agent, who asked that the seller look into the matter, and I have emailed the seller to see what he had done about it.
After several months, the delinquent taxes have still not been paid and penalties are being added, as well as a threat from the tax bureau to sell the property at auction. What is my liability here for unpaid real estate taxes that rightfully are owed by the seller? What is the settlement agent’s responsibility? --David

DEAR DAVID: This, unfortunately, is a problem, although more so with unpaid condominium fees than with real estate taxes.
This was the clear obligation of the settlement agent (called escrow company in the Western U.S.). When you go to settlement (or escrow) you expect to get clear title, free and clear of any liens, condo fees and/or real estate taxes. In fact, you have the right to obtain an owner’s title insurance policy, which provides coverage in the event there are any clouds on your title.
The settlement agent made a mistake. It was his or her obligation to do a title and lien search, and make sure that all real estate taxes and condo fees were paid to the date of settlement. If there are any such unpaid obligations, the settlement agent should have deducted them from the sales proceeds that were given to the seller.
My suggestion: If you did obtain an owner’s title insurance policy, file an immediate claim with that title insurance company. Your settlement agent has the further obligation to give you a copy of the title policy. If you obtained a mortgage when you went to settlement, contact your lender. At the very least, your lender has title insurance, and it clearly does not want you to lose your property at a tax sale.
You can probably expedite all of this by retaining a lawyer knowledgeable about real estate. That attorney should be able to resolve the problem with just one strong letter to the settlement agent.

DEAR BENNY: I have a rental house I have owned since 1977. It currently grosses $1,400 per month. The house is 120 years old and I have done most of the work on the house myself. Now that I am getting older (62), I would like to sell this property. I understand that federal taxes require a 15 percent capital gains tax, but what about the depreciation I have written off over the years? I don’t even have copies of my tax returns before 1980. I paid $24,000 for the house and a 2011 appraisal came in at $192,000. --Steve

DEAR STEVE: First, have you considered a 1031 (Starker) exchange? I have had many clients in your same situation; they owned rental property that had appreciated in value, and did not want to pay the hefty capital gains tax. Many of them were in your age bracket and were planning to retire in three to four years. We arranged for them to exchange their rental property (called “relinquished property”) for a rental property in an area where they wanted to live in retirement (called “replacement property”).
The replacement property has to be rental, but there is no time limit. The IRS follows the “old and cold” rule; namely, if you rent your property for at least two years, you should be safe.
Once the client retired, he would move into the replacement property. Bottom line, he would defer paying any capital gains tax. You must consult with a financial and legal adviser if you decide to go this route.
Now, back to your question: You really have to talk with an accountant before you decide to sell. Recapture of depreciation is complex, and depends on when you started depreciating and what method you used.
One word of caution, however: Congress is fiddling with tax reform, which may include an increase in the capital gains tax. Currently, as you suggest, it is 15 percent, but there is no guarantee what it will be next year. Of course, you are on the proverbial “horns of a dilemma”: On the one hand, if you wait a year or so, your property may be more valuable, but on the other hand, the capital gains tax may also be higher.
Bottom line: Give serious thought to the Starker exchange.

DEAR BENNY: My grandparents (both deceased now) owned land in New Jersey. My mother, their sole heir, has been paying the taxes on the land for several years now and is wondering if she could/should get the property deed put into her name? Is this necessary to do? Are there any advantages to changing the deed into her name only before death? Are there any disadvantages by leaving the property in her deceased parents’ names? --Jessie

DEAR JESSIE: This is a common problem. A property owner dies, and -- what we lawyers call “by operation of law” -- an heir now owns the property. But because it automatically went to the heir (by operation of law), there was no deed recorded into the heir’s name.
Should your mother put the property into her name? From a legal point of view, it really does not matter. So long as you have death certificates of the former owners, that is really all that will be necessary if and when your mother decides to sell. Confirm if you will need original certificates from your local recorder of deeds.
However, from a practical point of view, it is not a big deal to transfer the property into your mother’s name. There should be no recordation/transfer tax -- be sure to confirm this with your local recorder of deeds -- but only a nominal filing fee. By transferring the property, it provides peace of mind for your mother and for the entire family.

DEAR BENNY: My parents wanted to make sure my brother and I inherit their home. Several years ago, they had a new deed prepared. They wanted to remain on title for tax purposes but wanted us in the end to own the home.
The deed reads as follows: “A and B, husband and wife to A and B, husband and wife as tenants in the entirety along with C and D as joint tenants with right to survivorship.”
My mother passed in 2006 and my father passed in 2011. My father’s will left his real estate to another sibling. My brother and I are and were under the impression that once our parents passed the home would be equally ours and not be part of the will. Are we correct in this or is the other sibling able to inherit ownership? --Tracie

DEAR TRACIE: I suggest you retain a real estate attorney to assist you. This appears to be a case of poor draftsmanship by the attorney who prepared the earlier deed. Because there is, in my, opinion, ambiguity in the language, a judge may be convinced to look to the intent of the parties when they made that deed.
Let’s analyze: A and B (husband and wife) conveyed the property to themselves as tenants by the entirety. That means that on the death of one party, the other party owned the property by operation of law.
The deed also says “to C and D (brother and sister) and joint tenants with rights of survivorship.” That means that you and your brother owned half of the property with your parents and if one of you dies, the survivor would own the entire half.
But the question is: What happens when both your parents die? The answer lies (or should lie) in the way title was conveyed. If the deed would have said “to A and B as tenants by the entirety and as joint tenants with rights of survivorship to C and D, as joint tenants,” then clearly on the death of your father, you and your brother would own the entire property.
However, the deed merely says, “A and B along with C and D.” In my opinion, this is ambiguous. It could read that you and your brother own the property after your dad dies, but it could also mean that when your dad died, his half-ownership interest goes by his last will and testament.
A good attorney may be able to convince a judge that your parents intended you and your brother to own the entire house -- and not just half.
Keep in mind that between language in a deed and language in a will, the former controls. If, for example, I own property as joint tenants with rights of survivorship with my son, even if my will says that I give the property to my daughter, the terms of the deed will control.

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