Q. We recently placed my father, who will be 96 in a few weeks, into an assisted living facility nearby. It’s a terrible time to sell real estate right now. But if we have to sell the house, I wondered — since he is living in the care facility, and not in his home — how would the $500,000 exclusion work for him?
No one is living in his home and it is still in his name, and bills are sent to me but are in his name. My brother stays there when he is visiting the area.
As I understand the $500,000 tax exclusion, he has to have lived there for two of the last five years, meaning for him he’d have until he’s 101 to do this. He’s very healthy — just has dementia — so he might very well surprise us by living another five years.
Dad doesn’t have a huge income but the value of his home (even in this down market) will result in a considerable profit, which I would love to be able to preserve for him. I have his power of attorney and my brother and I are pretty much in agreement on how to handle things and we could use your advice.
A. You are correct that to exclude the gain from the sale of a principal residence there are two tests: ownership and use. You have to have owned and used the house for two out of the last five years. But that does not mean that he has to start living there now. The five years relates to the date of the sale. In other words, if your dad lived in the house for many years, and is just now moving to the assisted living facility, if you sell the house now, he would be entitled to the exclusion of gain.
Let’s take this example: He moved out in April 2010, but lived in the house for at least two years. If my math is correct, he will be able to claim this tax benefit until March 2013.
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But, there’s one more wrinkle: Only married couples are eligible to exclude up to $500,000 if they file joint tax returns. If you dad is now on his own or files a separate tax return, he would be limited to exclude only $250,000 of the profit.
If you believe that there will be a lot of profit — perhaps over the threshold — you should talk with an accountant who can try to assist you in determining your gain and even trying legally to reduce it.
Q. I purchased a house in 2005 to be used as rental property. This property is in a community association. In 2007, the association amended its covenants to place restrictions on the leasing of homes within the community. One restriction limited the maximum number of homes in the community that could be leased at any time to 10 percent.
There is a grandfather provision that reads: “Homeowners of record with existing leases on the effective date of this amendment are grandfathered and shall not be restricted in renting their homes by the limit on the maximum number of homes that may be leased until the current tenant vacates the home. Any grandfathered homeowner may lease his home even though the maximum number allowed has been reached.”
Last month, my tenant received a military transfer out of the area and has vacated the property. The association is stating that since the tenant left, the grandfather status was lost and that the number of rentals in the subcommunity of the rental house exceeds the 10 percent. They also informed me that the only hardship provision that has been accepted by the association is for property owners who are in the military and have been transferred from the area.
My questions are:
(1) Does the written grandfather provision appear confusing and contradicting? My understanding was that I would continue to fall under the grandfather provision as long as I owned the property.
(2) Is it the norm for the grandfather provision in leasing restrictions to be temporary (current tenant)?
(3) Can associations apply their own interpretation when there may be ambiguity?
(4) Does the association have a responsibility to keep landlords informed of the status of the rentals in their respective communities so the landlords are not shocked that they can no longer rent the property after their tenant vacates?
(5) What is the recourse when the landlord is coerced into selling his property and he experiences a significant loss from a quick sale and a depressed real estate market?
A. The issue of community associations imposing rental restrictions is something that every association in this country is facing, especially since the secondary mortgage markets (Fannie Mae, Freddie Mac, VA and FHA) have gotten more strict on enforcing these leasing requirements.
In my opinion, 10 percent is way too low a threshold; even FHA requires only 50 percent. Especially in today’s economy where money remains tight and sales are slow, it makes no sense to force a homeowner to sell when the tenant moves out. Boards should have a little heart — extend the time or grant a temporary hardship.
Answering your questions: (1) Yes, it does appear ambiguous, especially the last sentence, which seems to contradict the first. And in law, any ambiguity will be held against the drafter. (2) there really is no “norm” —in my experience, different associations enact different kinds of requirements; (3) see my answer to question No. 1 — a court of law (should you decide to litigate) will make the decision; (4) I don’t believe associations have an affirmative obligation to advise owners of the ongoing rental percentage, but it certainly makes sense to do so; (5) there is no recourse for the landlord other than to take the matter to court. However, in my opinion, there is significant impact on the association. Property values are lowered, and often the landlord cannot make the monthly association payments until the property is sold, so the association loses out.