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KASS: Flipped house turns into a flop

DEAR BENNY: We recently purchased a house from a developer who we call a “flipper.” He buys old houses, does some minor cosmetic work and then sells them. Within weeks after taking title, we discovered numerous problems, many of them major. The electricity was not up to code, the asbestos was not removed, and he did not get the necessary permits from our local government. What remedies do we have? – Clara

DEAR CLARA: I have to ask you a question first: Did you have a home inspection contingency in your sales contract?  I am a firm believer that every consumer must have their potential home inspected by a competent inspector and have a contingency whereby you can terminate the sales contract if there are problems with the house.

Oversimplified, you have two options: You can go to settlement, called escrow in the West, and sue for damages. Or you can go to court and ask for rescission, which is defined as the “unmaking” of a contract between parties. It is the unwinding of a transaction. This is done to bring the parties, as close as possible, back to the position they were in before they entered into a contract.

Unfortunately, the measure of damages for breach of a real estate sales contract often is not in the best interests of the buyer. Typically, although this can differ from state to state, it is the difference between the price you paid for the property and the value of the property purchased. So if the property was, in fact, worth what you paid for it, you would not get any money for damages.

Rescission also has its problems. You, the buyer, file a lawsuit against the seller, alleging such things as fraud, negligent misrepresentation, undue influence or illegality. The burden is on you to prove your allegations.

You have to discuss all options with your lawyer. I always tell two things to my clients who are faced with situations similar to yours: (1) there is no cash register at the back of the courthouse, meaning even if you get a judgment, the defendant may not have any money, and (2) sometimes it’s cheaper – and more convenient – to “bite the bullet,” and make and pay for the repairs yourself without spending the time and money filing a lawsuit.

DEAR BENNY: I would like to know if the law regarding requirements for qualifying for a $500,000 home-sale tax exemption is still the same or if it has changed since your answer a couple of years ago? My husband died in June 2014. Can I still qualify if I sell my house within two years of his death?

I also want to express my appreciation for all the valuable information you share with us. – Arlene

DEAR ARLENE: First, appreciate your kind comments. Always nice to hear from readers – positive or negative.

Current law allows homeowners who sell their principal home the right to exclude up to $500,000 of their profit if they file a joint tax return, or up to $250,000 if single. There are two important tests:

*Use: You must have used, or lived in, the house for two out of the five years before it is sold.

*Ownership: You also must have owned the property for two out of the five years before it is sold.

This is known as the “use and ownership” test.

In Publication 523, “Selling Your Home,” the IRS answers your question as follows: “If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home.”

Accordingly, if you meet all of the following requirements, you may exclude up to $500,000 of any gain from the sale of your home if: (1) the sale took place after 2008; (2) the sale or exchange took place no more than two years after the date of death of your spouse; (3) you and your spouse met the use test at the time of your spouse’s death; (4) you or your spouse met the ownership test at the time of your spouse’s death; and (5) neither you nor your spouse excluded gain from the sale of another home during the last two years before the date of death.

If you have any questions about these requirements, talk with a lawyer. If your husband recently died, you probably have been in contact with legal counsel in any event.

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: mailbag@kmklawyers.com.

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