Investing in pre-construction home can be disastrous
Can man get $25K deposit back after builder goes bankrupt?

Monday, November 13, 2020

By Robert J. Bruss
Inman News

DEAR BOB: About a year ago, I had an opportunity to buy into a pre-construction, out-of-town development. I checked out the local market, which at that time was a "hot" seller's market. So I invested a $25,000 deposit on a fourplex. Unfortunately, the developer was a crook who filed Chapter 7 bankruptcy. Is there any way to get my $25,000 back? --Todd Y.

DEAR TODD: If you are a regular reader of this column, you know I do not recommend investing in real estate that is more than an hour's drive from your home. The reason is then you can easily see, touch, smell, and watch it.

Purchase Bob Bruss reports online.

You didn't "invest" $25,000 in that out-of-town project. You speculated when you turned over your $25,000 to the developer.

Some states, such as California, require pre-construction deposits be held in a trust or escrow account so the developer can't use those funds. Apparently, that didn't happen or the developer's bankruptcy trustee would have informed you.

What did you learn from this expensive lesson? (1) Don't invest out-of-town (2) with people you don't know and (3) who control your money. In the future, I suggest investing (not speculating) close to home where you can inspect the property before purchase.


DEAR BOB: Our house is owned under my living-trust name. If I survive my husband, will the basis for the house be stepped up to market value as of the date of his death? Should I add my husband's living trust to the deed? --Eliza W.

DEAR ELIZA: If the title to your house is in the name of your living trust and it is not a joint living trust with your husband, if he dies before you do, there's nothing for you to inherit. Therefore, you won't receive any stepped-up basis to market value on the date of his death.

However, if you and your husband have a joint living trust and he dies first, in a common-law state you will receive a new stepped-up basis to market value for the 50 percent inherited from your husband. But if the residence is held in a community property state with both spouse names on the living trust, if your husband dies first then you receive a new 100 percent stepped-up basis to market value.

For readers not familiar with the two major benefits of holding real estate titles in your living trust they are (1) avoidance of probate costs and delays, and (2) management of the property by the successor trustee if the original trustor becomes incapacitated, such as with Alzheimer's disease or a severe stroke.

Please consult a local attorney who specializes in living trusts. It sounds like you need to change the title to your house to include your husband. More details are in my special report, "24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays," available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant delivery at


DEAR BOB: My wife and I own a single-family rental house that was severely damaged by an accidental fire caused by our tenant. The house will have to be demolished and rebuilt. Our landlord insurance policy is expected to pay both the costs of rebuilding and our rental income losses for up to 12 months after the fire. We realize the rental income will be taxable in the years received. But what are the tax effects of receipt of the remaining insurance proceeds to rebuild? --Peter R.

DEAR PETER: The situation you describe is an Internal Revenue Code 1033 involuntary conversion. You have up to two years after the end of the tax year in which the conversion loss occurred to either rebuild or reinvest the insurance proceeds tax-free in a similar use property.

If your loss exceeds the insurance proceeds, you may qualify for a casualty loss business deduction on the excess loss. For details, please consult your tax adviser.


DEAR BOB: My friend has a neighbor who plays very loud music outdoors. Because of a disability, my friend is severely affected by the vibrations. His homeowners association refuses to help. No other home is close enough to be affected by the noise. Is this a "private nuisance" that I have read about in your column? Does the fact he is disabled offer any special recourse? --Stephen O.

DEAR STEPHEN: You are correct about this being a private nuisance. Presumably your friend has politely asked the neighbor to keep the noise down, but without results. His next recourse is a private nuisance abatement lawsuit against the neighbor.

Your friend should consult a local real estate attorney for details. The disability doesn't create any special legal advantage.


DEAR BOB: Is it worth cashing out my mutual funds (earning about 5 percent) and my savings account (earning 4.25 percent) to pay off my home equity credit line (HELOC), which is locked at 7.5 percent interest? I like the security of the mutual funds and having cash in a savings account. If I decide to pay off my HELOC, I was told it is better to pay it off slowly over six months rather than all at once. Is that true? --Brad K.

DEAR BRAD: Earning 4 percent to 5 percent (about 3 percent to 4 percent after taxes) interest income, and paying 7.5 interest (around 5 percent after tax deductions) makes no sense. Pay off your HELOC.

If you need the funds for an emergency or home improvements, you can always write a check on your HELOC and borrow the money again. It doesn't matter for your FICO (Fair Isaac Corp.) credit score whether you pay off the HELOC all at once or gradually. By paying off your HELOC, your FICO score should improve.


DEAR BOB: My husband and I lived in our home for 22 months before selling it. He reads the tax law to mean that we get a tax exemption for the time spent in our house. For example, if we lived in it 12 months, we would get 50 percent of the $500,000 exemption for a married couple. Is this correct or will we owe tax on our sale profit? --Michelle F.

DEAR MICHELLE: It's a shame you didn't wait to sell until after 24 months of ownership and occupancy to obtain the full $500,000 tax exemption.

Your husband conveniently misunderstood Internal Revenue Code 121. To qualify for a principal-residence-sale partial exemption, the reason for the sale must be one of those specified in the tax code and its regulations.

What was your reason for selling your home after only 22 months of ownership and occupancy? Was it due to a job location change, health reasons, or "unforeseen circumstances" such as divorce, job loss, multiple births, etc?

If your reason for the early sale qualifies, then you may be eligible for a partial tax exemption up to 22/24 (11/12) of the $500,000 exemption for a married couple (up to $250,000 for a single home seller).

However, if you sold your home for other reasons, such as moving to a better neighborhood or a bigger house, then you don't qualify for a partial exemption and your capital gain is fully taxable. For details, please consult your tax adviser.


DEAR BOB: We are in the process of trying to buy a house from a couple involved in a nasty divorce. They each have "street fighter" divorce lawyers who use one tactic after another to delay the sale closing. Just when we get close to a closing date, it gets postponed. The latest tactic is we will only get two quitclaim deeds, one signed by the ex-wife and one signed by the ex-husband. Is this dangerous for us? --Ryan T.

DEAR RYAN: No. Quitclaim deeds are very common in divorce situations. Neither ex-spouse wants to make any warranties or representations as to the condition of the property title.

Your best protection is to obtain an owner's title insurance policy from a reputable title insurance company. Read it very carefully to be certain there are no liens or encumbrances you weren't expecting. It is perfectly safe to accept a quitclaim deed if you also receive an owner's title insurance policy.

The new Robert Bruss special report, "The 20 Essential Questions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer's Market," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant internet delivery at Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center).


What's your opinion? Send your Letter to the Editor to [email protected].

Copyright 2006 Inman News


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