Q. A real estate developer planned to build an upscale 48-unit town house development. The design work was completed, a general contractor was hired, and construction work began. Four models were built and furnished, a sales office was set up, and sales began. The first two units were sold, and the new owners moved in. However, 12 months after the first units were sold, only two of the units were occupied.
Then the developer and general contractor became involved in a dispute. The project has stopped for six months, and it looks like it might not get under way again. The arbitration process that’s under way between the developer and the contractor is moving very slowly.
What are the alternatives available to me, one of the two homeowners? It’s unlikely I can sell my unit to someone else with the entire project in such an unfinished state. If I could, it would probably be at a considerable loss.
Could the developer be obligated or required by law to buy back the two finished units if the development doesn’t get under way again within a reasonable length of time? Is there a government agency or an individual who could exert some pressure on the developer and contractor to resolve their dispute and get the project moving again?
A. Yes, you and the other owner have a large investment at stake, and you both should retain a real estate attorney in your area.
In general terms, the developer is either obligated to make the association fees for the units he still owns or at the very least should be obligated to pay all expenses of the association, less the contributions that you two owners have to make. The specific answer to this question will be found in your legal documents, which the attorney can read and give you advice on.
The more basic question, however, is what, if anything, can you do to get the complex finished? That’s a real problem. It is possible that the developer, even if he resolves his dispute with the contractor, does not have any more money. My concern is that the bank may ultimately foreclose on the project, and who knows what they will do if no one buys at the auction sale?
You or your attorney should at the very least talk with the developer and the developer’s bank. If the project had been completed, at least the houses could be sold or rented. But if they are not yet built, you have a real problem.
You can try to get the developer to buy back your houses, but, as indicated, he probably does not have the money. You should also talk with the bank that lent you the money to buy the property. They will take the position that this is not their concern, as you owe them money and they expect prompt monthly payments.
You should also talk with the attorney general’s office in your state. I am not sure what they can do, but perhaps the have some proposals that could assist you. I know this answer will not be satisfactory to you. But, and it will not be any consolation, you are not alone. This is a nationwide problem.
Q. Your recent article about the man who wanted to gift his house to a friend raised a question in my mind. Suppose the house received a stepped-up basis after the man’s wife died. If he then gifts the house to the friend, does the friend receive the stepped-up basis as his tax basis, and does the man have to deduct the stepped-up basis from his lifetime exclusion?
A. First, this year there really is no step-up in basis. Let me first explain what that was.
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Example: A husband and wife bought property many years ago for $50,000. The husband dies, and the value of the property at the time of death was $400,000. Assume there were no improvements. The basis for tax purposes for each spouse was $25,000 each. But on the husband’s death, half of the fair market value, namely $200,000, is added (stepped up) to the wife’s tax basis, and now her basis is $225,000.
However, for 2010, Congress repealed this concept and substituted what tax attorneys are calling a “modified carry-over basis.” Oversimplified, in our example, the new basis for the wife would be the lesser of the husband’s adjusted basis or the fair market value of the property at the time of death. In other words: only $25,000 would be added to the wife’s basis, which would then become $50,000.
It should be noted that even this has a limitation. Under no circumstances can the basis be more than $1.3 million, but if the property was passed to the surviving spouse, it can be increased by an additional $3 million.
Assuming a stepped-up basis exists, the husband would get that benefit. If he then gifts the property to a friend, that friend takes advantage of the new tax basis. General rule: The basis of the giver of the gift (the donor) becomes the basis of the receiver (the donee).
And the donor would have to report to the IRS the amount of the gift, less $13,000, which is free from gift tax. This would be deducted from his lifetime gift allowance.