PROPERTY INSPECTIONS

When buying a new property, most Buyers obtain a standard pest control report costing about $175. The Buyers review the report and negotiate with the Seller about paying for the problems disclosed in the report.

The Buyers should be present at the inspection and should freely ask the inspector questions. They should make sure there are no significant areas which are inaccessible and therefore cannot be inspected.

A $175 inspection is only the starting point. The inspector will not move boxes or materials or drill holes to inspect areas he cannot readily see.

If the property "passes" the $175 inspection, consider more in depth inspections which could alleviate significant and costly problems in the future. Spending an extra $750 may help avoid a lemon.

If undiscovered problems surface after a purchase, many Buyers want to sue. But avoidance of the problem by thorough inspections before the purchase is a much better solution.

The law requires that a Seller disclose known problems. A Seller has no liability if the Seller did not know about a problem.

Mr. and Mrs. Q had a $175 inspection before they bought their new home. The report states that the entire foundation was inaccessible and was not inspected. There did not appear to be any significant pest problem.

Mr. and Mrs. Q bought the home. They began minor repairs and discovered a $60,000 problem: the foundation was crumbling brick. "Let's sue!" they cried.

We explained that there is no liability if the Seller did not know there was a problem. Disclosure of known problems is required. If the Seller did not know about the problem, he has no liability.

A property purchase is the biggest investment most people make. Have it thoroughly inspected by professionals who work for you and who know what they are doing!

USE THE RIGHT LAWYER

We recently settled an interesting case involving alleged misadvice by a Realtor about tax consequences of a real estate transaction.

Mrs. S sold house #1 and bought house #2. The listing agreement and both purchase contracts stated that the Realtors cannot give tax advice; Mrs. S should consult her personal tax adviser. When Mrs. S completed her tax returns and discovered that she owed $20,000, she decided to sue.

She claimed that one of the 3 agents involved had told her that the transaction would be tax free. In fact, it was not.

§1034 allows the tax deferred rollover of profit on primary residence #1 replaced with primary residence #2 acquired and occupied within 2 years of the sale of #1. The Over-55 Rule exempts $125,000 of profit on a primary residence. Both of these rules are simple to use.

For investment or rental property, §1031 allows tax deferred rollovers ("Starkers," or "deferred exchanges") of profit if it is structured right from the beginning. This is a very technical area and must be followed precisely.

Mrs. S sold a rental property. §1034 and the Over-55 Rule do not apply. [They apply only to a primary residence.] Mrs. S did not structure the sale to qualify for §1031. She really owed $20,000 of tax. So she sued.

At the lunch break in the middle of her deposition, Mrs. S settled for a nominal amount. The major reason she settled was that we examined her tax return and immediately discovered many discrepancies and inconsistencies which were not readily apparent to any of the other 3 attorneys involved.

When we pointed out these inconsistencies, Mrs. S decided that she did not want to discuss them in Court, and settled for a small sum.

The right lawyer made this case go away easily. Another lawyer would not have spotted the tax issues or understood how to use them.

This drives home the necessity of using the right lawyer for the right case.

A STITCH IN TIME . . .

Mrs. K called. Her 10 unit apartment building was put into receivership by her bank. She asked, "What can I do?"

I explained that Receivership usually happens only after a lawsuit is over. "Oh yes, I got a lawsuit, but I did not do anything about it." She did not hire a lawyer; she lost by default.

I explained that it is unusual for a bank to seek receivership rather than foreclosure. Mrs. K replied that she also had foreclosure notices. Then she said that the Trustee's Sale was today!

Why did Mrs. K wait until the morning of the sale to do anything? We regularly receive calls from people who take the `ostrich approach' until it is too late.

It is important to act promptly to protect legal rights. Mrs. K ignored her rights and the building was lost. Mrs. K could have done many things to save the building. But she let a lawsuit go unanswered, and ignored foreclosure notices until the very last day.

Now, Mrs. K's only right is the right to pay tax on the profit of the sale. As unbelievable as it sounds, the foreclosure results in a taxable profit.

Mrs. K bought the apartment in 1989 for $460,000. After depreciation ($57,574) her tax cost is $402,426.

The mortgage was $425,000, after adding all of the penalties and delinquencies.

Therefore, her 1993 taxable profit is $22,574, even though she lost her entire investment.

Foreclosure is treated as a sale for the amount of the mortgage, and is fully taxable.

Sometimes delay will only cost extra. Recently Henry called about a §1031 exchange. We discussed the rules and advised him to contact an accommodator who would facilitate the transaction. Henry's Realtor called 3 weeks later: "Henry did not call the accommodator, until yesterday. The accommodator is now on vacation; escrow is closing tomorrow!"

Henry was lucky; he got another accommodator (who charged a hefty premium for instant service) and the transaction worked fine.

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