Can Mistakes in Deeding Property be Fixed?

What if you contract to sell one piece of property to a buyer, but end up selling the wrong piece of land at closing? What if you promise to sell the buyer a whole piece of land, but mistakenly only deed a part of the land to the buyer? Worse yet, what if you promise to deed the buyer only a portion of the land, but you inadvertently deed the entire land to the buyer at closing? Can these errors be rectified? The simple answer is yes, but it must be qualified. An error in the transfer of property can only be corrected if there is a mutual mistake of fact between the parties. In such an instance, the court can modify or re-write the deed to make it consistent with the seller's and buyer's actual mutual intent. What happens when the seller and buyer cannot agree?

A recent court case, Wheeler-Dealer, Limited v. Christ, 319 Ill.Dec. 79 (1st Dist. 2008) illustrates the consequences, which can be disastrous. In that case, the seller and the buyer entered into a contract to sell / purchase real estate; no property address was written in the contract, only a legal description. The legal description identified only a portion of the lot; specifically, it referred to the "east 165 feet of lot 4". At the time of closing, the seller deeded all of lot 4 to the buyer.

Afterwards, the seller sued the buyer, stating that he only meant to deed the east 165 feet of lot 4, as per contract, and he should receive the rest of the lot back. The buyer claimed that his intention had always been to purchase the entire land. The court believed the buyer, who won the case.

Moral of the story? Be very, very, very careful when drafing deeds and other documentation affecting the sale of real estate. A simple typographical error can cause a great deal of expense and heartache, and it can't always be fixed!

Home Repair and Remodeling Act Basics

If you are entering into a contract to repair or remodel your home, you should be aware of the Home Repair and Remodeling Act (815 ILCS 513/1 et seq.). The purpose of this law is to protect Illinois homeowners and contractors, and it requires some disclosures and documentation so that the parties are aware of their respective obligations.

Specifically, if a homeowner is remodeling or completing repairs for $1,000 or more, the contractor must give that homeowner a brochure entitled "Home Repair: Know Your Consumer Rights" prior to signing the contract. Then, prior to beginning work, the contractor must obtain a signed contract or work order. If a contractor does not comply with these requirements and the other requirements of the Home Repair and Remodeling Act, the contractor will be unable to enforce the agreement against the homeowner.

It is important for homeowners to understand, however, that in a recent case, MD Electrical Contractors, Inc. v. Abrams, 228 Ill.2d 281 (2008), the Illinois Supreme Court determined that this law applies only to contractors, not to subcontractors . Subcontractors contract directly with the general contractor; they do not typically sign an agreement with the homeowners, and are therefore not required to provide disclosures to the homeowner either. If your general contractor is working with subcontractors to complete repairs on your home, it is important for you to make sure that the subcontractors are being paid and are providing mechanic's lien waivers on an ongoing basis. If you are diligent throughout your home repair project and ensure that the documentation completed and the payments made are correct, you can prevent costly mechanics' liens and suits.

Complying with Smoke and Carbon Monoxide Detector Laws in Illinois

Smoke detectors and carbon monoxide detectors have helped save many lives. Illinois has codifed the necessity for these devices in the Smoke Detector Act and the Carbon Monoxide Detector Act. Following these rules can not only protect you and your family, but will also assist you in selling or leasing your home.

Smoke Detector Act -- Per state law, every single-family home must have a smoke detector installed on each floor, including the basement. For other dwelling units, there must be at least one working smoke detector within 15 feet of every bedroom or other room used for sleeping purposes. All smoke detectors must be installed on the ceiling, at least 6 inches from any wall. Smoke detectors may also be installed on the wall, so long as they are between 4-6 inches away from the ceiling. Additionally, if a building contains more than one residential unit, or if the building is a mixed-use building and there is at least one residential unit, then a smoke detector must be installed on the highest ceiling of all stairwells inside the building.

Carbon Monoxide Alarm Detector Act -- Per state law, most residential units must have at least one working carbon monoxide detector within 15 feet of every bedroom or other room used for sleeping purposes.

Keep in mind that when you go to sell your home, your buyer will probably hire a professional inspector to inspect the home. Property inspectors are trained to look for smoke and carbon monoxide detectors, test them, and make sure they are properly installed in appropriate locations. Having these devices installed and in working order will help your inspection go smoothly.

Additionally, if you are leasing your unit, by state law you are required to have all smoke and carbon monoxide detectors installed and in working order. Once your tenant has moved in, maintenance of the smoke detector becomes his resposibility, including testing and changing batteries. If there is anything seriously wrong with either the smoke or carbon monoxide detectors, then the tenant should notify the landlord in writing and the landlord should have the problem corrected.

Landlords and Lead-Based Paint Laws

Lead-based paint was primarily used in homes built before 1978, but its effects are still being felt today. Lead is a toxic substance; exposure to lead increases the level of lead found in your blood, which can cause learning and other behavioral disorders. Chipped or cracked lead-based paint can increase your exposure to the lead in the paint. In 1978, Congress banned lead-based paint, and a variety of federal guidelines were put into place.

As a landlord or property manager, under federal law you are required to do the following to protect yourself: 1) If the property was built before 1978, you must provide a disclosure to your tenants stating whether or not you have any knowledge of lead-based paint being present in the home; 2) Include a warning statement about lead-based paint in your lease; 3) Give your tenant a copy of the federal HUD/EPA pamphlet "Protect Your Family from Lead in Your Home" (which your real estate agent or real estate attorney should be able to provide); and 4) Avoid the use of lead-based paint and other lead-based products when making repairs.

As a landlord in Illinois, you must also abide by the following practices: 1) If a lead hazard is found on your property, you must mitigate the hazard using regulated procedures; 2) If a tenant is found to have lead-poisoning, you must allow a public health agency to inspect your property; 3) You must allow the local public health department to inspect your property if at least two units in your rental building have received lead-based paint mitigation notices in the past five years; 4) You must allow the local public health department to inspect your property if a pregnant woman or the parent of a small child requests an inspection, which they may request so long as at least two units in the building have received lead-based paint mitigation notices in the past five years; 5) If any unit in your rental building has received a lead-based paint mitigation notice, you must post a notice stating as much in the common area of the building; and 6) If your building or rental property houses two or more families, you must post a lead hazard warning sign when construction is being performed.

Some municipalities in Illinois, such as the City of Chicago, have other requirements also. Prior to entering into any lease, make sure you are familiar with the rules in your city. It is important to be diligent and provide all notices and warnings required by law, both for your safety and for the safety of your tenants.

Qualified Personal Residence Trusts (QPRT) and Depressed Real Estate Values

Home values seem to be dipping every month, and face it, you're not getting any younger. Have you considered that upon your death, the value of your home might be enough to push your estate from non-taxable to taxable? If you were to die in 2008 and your estate was valued at less than $2,000,000, there would be no federal estate tax. But if the value of your house (or anything else, for that matter) causes you to exceed that magic number, then presto -- your estate is paying taxes.

A QPRT (Qualfied Personal Residence Trust) is essentially a way to move your home out of your estate, thereby lowering the value of your estate upon your death. At the same time, you still get to live in your home while you're alive.

How does this work? Let's say your house was worth $750,000 in early 2007 but is only worth $500,000 now. Let's also assume that your goal is to leave your house to your children upon your death. You can lock in the lower value of $500,000 by gifting the house into a QPRT right now with your children as the beneficiaries of the QPRT. The trust must be created for a fixed amount of time (10 years is standard, but not required). The trust terminates either when that time expires, or upon your earlier death. At that point, your beneficiaries inherit the house. The house is not considered as part of your estate, and is therefore not subject to estate tax.

So what's the downside? Well, there are a few things -- first of all, when you gift your house into the QPRT, you have to file a gift-tax return with the IRS in the year that you gifted the house. Currently, the IRS allows you to gift up to $1,000,000 tax-free during your lifetime. So if your house is worth $500,000, you won't owe any gift tax right now. If your house is worth more than a $1,000,000, you will. Second, you do have to continue to pay the costs associated with living in the house during the term of the trust, although you would have to do that anyway. Third, once the term of the QPRT expires, if you are still alive, you will have to pay fair-market rent to the beneficiaries of the QPRT to continue living there, or risk scrutiny from Uncle Sam.

If you are concerned about your beneficiaries and the tax burden they may face upon your death, now is a good time to act. By creating a QPRT, you can take advantage of current depressed real estate values to help protect your heirs in the long run. Even if you do not feel a QPRT would be a viable estate planning device for you, there are other estate planning tools out there that may be right for you. Whatever you do, make sure your family is financially prepared in the event of your death.

Is the Developer Liable for Providing False Square Footage and Ceiling Heights?

Condominium owners often wonder if the information they were given about the size of their unit is correct. They find themselves asking questions such as: Is it really 1,000 square feet? Or: That second bedroom looks kind of small -- Did I get cheated? Is the ceiling really 10' high? Isn't that what my contract said it should be?

Well, there are two ways that developers and architects can measure footage of a condominium unit, and both are widely accepted: 1) From inside wall to inside wall -- meaning, from the surface of the drywall on one wall, to the surface of the drywall on the wall across from it; this is commonly called the "paint to paint" measurement. 2) From the outside wall of the unit to the middle of the opposing wall.

In a recent case, Kirkpatrick v. Strosberg, 2008 Ill.App.LEXIS 358 (1st Dist. 2008), the condominium owners sued the developer because they felt that the square footage of their units was less than what the developer had stated when marketing the property. However, the court found that the developer measured from the outside wall of the unit to the middle of the opposing wall, and that this was a standard practice. Therefore, the developer was not held liable on this count.

However, in the same case, the condominium owners also alleged that the developer had stated that the ceilings in the units were 9' high, when in fact they were only 8'6" high. The developer claimed that per the contract each unit buyer had signed, the dimensions were simply approximate and subject to adjustment. The court found that on this count, the developer had acted in bad faith because the location of pipes, ductwork, and other items built into the ceilings could not possibly allow room for 9' ceiling heights.

Of course, each case is different. If your fellow condominium owners feel that they were deliberately misinformed when purchasing their units, then their best bet is to consult with an experienced condominium attorney to determine if they have a case against the developer.

Act Quickly to Protect Duplicate Real Estate Tax Payments!

Many times property owners forget that they have escrowed money with their lender for property taxes. As a result, Illinois counties often receive duplicate tax payments on an individual parcel of property -- one from the bank and one from the property owner. If your bank is escrowing your taxes and you erroneously make a duplicate tax payment, you should submit a property tax refund request to the county. To do so, you can go online to your county treasurer's website and follow their instructions. Most of the time, you will receive a refund within a few months.

But what happens if you forget to request the refund? How do you get your money back? Well, in Illinois you can get duplicate tax payments back as long as you submit your request within five years. The court recently confirmed this in Alvarez v. Pappas, 208 Ill.LEXIS 315 (2008). In that case, the plaintiffs were unaware that their bank was paying their tax bill directly to the Cook County Treasurer's office, so they inadvertently paid it themselves as well. Eventually, they sued Cook County for the return of the overpayment.

Unfortunately for the Alvarezes, they lost. The Illinois Property Tax Code states that there is a five-year statute of limitations for a property owner to request a property tax refund. After that, the taxing authority does not have to refund the money.

But please don't misunderstand me! If you realize that you have submitted a duplicate tax payment, you should request your refund immediately. The longer you wait, the harder it will be to get your money back and the more red tape you will have to deal with! You also don't want to have to go to court to get your tax money back, as that will be a costly and time-consuming process.

Off topic: An Overview of Illinois Lemon Laws for Vehicles -- Turning Your Lemon into Lemonade

People are always asking me about other areas of the law, and car troubles and their legal ramifications have come up more than once! Sergei Lemberg, an attorney specializing in lemon laws, is guest blogging today. I hope you find his article about lemon laws in Illinois informative!

If you’ve ever bought a new car, you know what a rush it is. There’s the new car smell, the feeling of power as you hit the accelerator, and the peace of mind knowing that you’ll have a reliable ride for a long, long time.

But what happens when that new car isn’t so reliable? When you wake up one morning and have to come to terms with the fact that you’ve bought a lemon? Well, Illinois lemon law can help.

Every state has a lemon law, but that each of them is different. Under Illinois’ lemon law, some vehicles qualify as lemons and others don’t. If you’ve bought a new passenger vehicle, SUV, van, or truck, with a gross vehicle weight rating of less than 8,000 pounds you’re covered – if the vehicle is used for personal (as opposed to business) purposes. If you’ve bought a used car during the new car warranty period, you’re covered. If you’ve bought a new motor home, you’re covered. And, if you’ve purchased, leased, or licensed your new vehicle in Illinois – yep, you’re covered.

Now, on to definitions. In order to be considered a “lemon,” your vehicle’s defects have to affect its use, safety, or value. In other words, if it’s something minor, you don’t have a case. The other catch is that the defects have to occur during the first year from the delivery date or the first 12,000 miles on the odometer – whichever comes first. In addition, the vehicle must have been taken in four times for the same problem or been out of service for 30 business days. Plus, the manufacturer has to have the opportunity to repair the vehicle one last time.

It’s important to remember that manufacturers have teams of lawyers that do nothing but fight lemon law claims, and that battling them will be much easier with a lemon law attorney at your side. Because Illinois state law says that, if you pursue remedies under the lemon law, you give up your rights under the Uniform Commercial Code, it’s really important to consult an attorney about which is the best option for you. With the help of a lawyer, you can often get a refund, replacement vehicle, or cash settlement without having to go through the entire lemon law process – and get your attorney’s fees covered in the process.

Foreclosed Cook County Homeowner Alert: Foreclosure Evictions to Start Again

On October 9, 2008, the Cook County Sheriff's Department announced it was suspending evictions of all foreclosed homes within county limits. The sheriff's primary concern was for tenants in foreclosed properties, not property owners. Tenants in properties facing foreclosure were not receiving notice of the potential or actual foreclosure from the banks as required by law. With neither the banks nor landlords notifying them, many tenants knew nothing about having to vacate their homes until the sheriff's office came knocking on their doors.

Last week the court promised to enforce the rules requiring banks to provide a four month grace period before forcing tenants to move out. Additionally, banks will have to notify the court of all tenants residing at the property, and prove that they gave each tenant notice of the foreclosure. While adhering to these rules will prolong the foreclosure process for properties inhabited by tenants, tenants will be protected and receive time to find an alternate place to live.

The Cook County Sheriff is satisfied that these new rules will help tenants, and is therefore lifting the ban on foreclosure-related evictions effective today, October 20, 2008.

Cook County Sheriff Suspending Foreclosure Evictions

More good news for distressed Cook County homeowners: The Cook County Sheriff's Department announced this week that they are suspending service of evictions notices on people who are being foreclosed, as well as renters in buildings that are being foreclosed because the landlord has been unable to make mortgage payments.

Particularly with respect to renters, the Cook County Sheriff is requesting that banks give tenants notice of the foreclosure and time to leave voluntarily if the landlord has not paid the mortgage; while landlords routinely get such notices from their banks, they usually do not share them with tenants. As a result, tenants often know nothing about having to vacate the property until the sheriff shows up at their door.

The Cook County Sheriff's Department has chosen to take this course of action despite the fact that it violates numerous foreclosure decrees issues by Cook County courts. It is yet to be determined if the sheriff's office will continue to suspend foreclosure-related evictions, or if they will be held in contempt of court. In the meantime, distressed Cook County homeowners who have been foreclosed can stay in their homes!

Good news for distressed Illinois homeowners with Countrywide mortgage loans!

Finally, some good news for the thousands of people who are being foreclosed and losing their homes: Countrywide (now part of Bank of America) recently entered into an $8.4 billion settlement with 11 states, including Illinois. Illinois' share of this settlement amounts to $190 million, and these funds will be used to assist approximately 21,000 distressed Illinois homeowners who obtained loans from Countrywide Mortgage prior to December 31, 2007.

Specifically, these homeowners can expect to have their interest rates reduced; in some cases, even the principal of the loan may be reduced. The goal is to make their monthly payments more affordable, ideally 32% or less of a family's income. Additionally late fees, loan modification fees, and prepayment penalties will be waived. Certain families that already lost their homes as a result of foreclosure proceedings shall receive cash payments. Countrywide/Bank of America will also suspend ongoing foreclosure proceedings for those homeowners who qualify for assistance as a result of the settlement.

To see if you qualify, call the bank at 800-669-6607; make sure you have all of your loan information handy when you call. You can also call the hotline set up by the attorney general's office, at 866-544-7151.

Tenant Troubles: How to Get Rid of Bad Residential Tenants

I have quite a few clients who own residential investment property, such as condominiums or townhomes or even single family homes that they rent out. On occasion, I get a phone call from a client who has a "bad" tenant -- in other words, a tenant who is not paying rent or is breaking the lease in some other way. What should you do if you are a landlord and this happens to you? Well, you should start simple and hope that you can resolve the problem without having to file an eviction.

So how do you start simple? I always recommend that you call or visit your tenant and try to talk the issue through -- give them a day or two to fix the problem. Sometimes that's the easiest way to resolve the matter.

If that doesn't work, you need to hone in on your specific problem so you can provide the appropriate notice pursuant to Illinois law:

1. The tenant is not paying rent. If your tenant is not paying rent, you need to provide a Five Day Notice. A Five Day Notice should clearly state "Landlord's Five Day Notice" at the top. It should go on to detail the name of the landlord and the tenant, the address of the rental property, and the amount of rent outstanding. The notice should clearly state that the in the event rent is not paid within five days, the lease will be terminated. The following language should also be written into the Five Day Notice: Only FULL PAYMENT of the rent demanded in this notice will waive the landlord's right to terminate the lease under this notice, unless the landlord agrees in writing to continue the lease in exchange for receiving partial payment.

Contact your attorney to make sure the Five Day Notice is prepared and served properly; in case you end up having to formally evict the tenant through court proceedings, it will be necessary to show proper notice. If the tenant does not pay up within five days of receiving the Five Day Notice, you may file an eviction under the relevant forcible entry and detainer statute.

2. What happens when your tenant is paying rent, but is violating the lease in some other way? In this case, you need to provide a Ten Day Notice to the tenant. The notice should be clearly labeled "Ten Day Notice". Again, the landlord, tenant, and rental property should be identified. The notice much clearly state how the tenant is in violation of the lease, and should further state that if the tenant does not conform to the lease within ten days, the lease will be terminated. Again, you should contact your attorney to make sure your Ten Day Notice is prepared and served properly. If the tenant does not rectify the situation within ten days, you may commence eviction proceedings.

Illinois Landlords, Tenants and Residential Security Deposits

Landlords know how important security deposits are in residential leases. The threat of losing their security deposit can keep tenants honest. Good landlords don't want to hold back the security deposit after the tenant leaves; they would much rather have their home or apartment back in good shape. Tenants, too, look forward to the return of their security deposit when they move out. Illinois has two laws governing security deposits, and it is easy to run afoul of them:

1. The Security Deposit Interest Act: This law requires all landlords who have 25 or more units in one building or complex to pay interest on security deposits to their tenants, so long as the landlord hold the security deposit for more than 6 months. The interest rate is calculated based on the savings account interest rate payable by the state's largest bank at the end of the year preceding the year in which the tenancy commences. For leases that started in 2007, that interest rate is .5%; for leases that started or will start in 2008, that interest rate is .35%. For leases that will start in 2009, the security deposit interest rate will be calculated on December 31, 2008.

But be careful! Chicago and certain other municipalities have different rules regarding security deposits and calculate the security deposit interest in a different manner. For example, in Chicago, the interest rate on security deposits for leases entered in 2007 is 1.68%; for 2008 leases, it's 1.26%. If you are a landlord, before paying any interest, you should check with the municipality in which your units are located to determine the correct interest rate. Fortunately, most municipalities do follow the Security Deposit Interest Act and will not have their own interest rate on security deposits.

2. The Security Deposit Return Act: Landlords who have 5 or more units may withhold all or a portion of a tenant's security deposit if the following conditions are met:

a) Within 30 days after the tenant leaves, the landlord must give the tenant an itemized list of the damage the tenant caused, along with the cost (either actual or estimated) of repairing the same.

b) If the actual cost is provided in the notice, the landlord should include a copy of the paid bills and receipts for the repairs. If an estimated cost is provided in the notice, then the landlord must provide paid bills and receipts for the repairs within 30 days after the notice in (a) above is provided.

c) The notices to the tenant shall either be hand-delivered or mailed to the tenant's last known address.

If the landlord follows the rules above, and if the cost of the repairs is reasonable, the landlord may withhold the portion of the security deposit necessary to complete the repairs, or, if the cost of repair meets or exceeds the security deposit, the landlord may withhold the entire security deposit. If the landlord fails to comply with the requirements of (a), (b) and (c) above, the landlord must return the entire security deposit to the tenant within 45 days after the tenant leaves.

Landlords beware: If you hold back all or part of the security deposit and a court finds that you acted in bad faith or did not follow the provisions of the Security Deposit Return Act, you could be liable to your tenant for twice the amount of the security deposit, in addition to the tenant's court courts and attorneys' fees.

Please note: The rules for security deposits for City of Chicago landlords are different! City of Chicago landlords are subject to the Chicago Residential Landlord Tenant Ordinance. It is important for Chicago landlords to comply with the provisions of that ordinance. For more information on the City of Chicago's rules pertaining to security deposits, click here.

Cook County Real Estate Taxes -- More Bad News for Homeowners

As if the real estate market hasn't had it bad enough this year, Cook County's real estate tax bills will be coming out soon and will be due on November 3, 2008, and unfortunately, the taxes are going up.

While home prices are plummeting, real estate taxes are not. In fact, Cook County's north and northwest suburban homes were reassessed last year. The second installment tax bill that homeowners will soon receive will include these increased assessments. Unfortunately, the increased assessments are valued as of January 1, 2007, before the housing market crashed. Therefore homeowners will be paying taxes based on home values inflated beyond where they are today.

The City of Chicago will not be reassessed until 2009. In the meantime, their property taxes are still based on home values as on January 1, 2006, when the housing market was peaking. Some Chicago homeowners will thus see large increases in their tax bills this fall.

Southern Cook County suburbs are being reassessed this year; therefore tax increases in that area based on assessed value increases should be negligible, if any. Additionally, when the new assessed values for southern Cook County are complete, homes should be valued as of January 1, 2008. It remains to be seen what sort of tax increase southern Cook County homeowners will face in coming years.

If your taxes have gone up, you still have options! You can appeal the property taxes and attempt to get a reduction. If the time for filing an appeal has passed, the property can still be appealed through the Board of Review. Filing deadlines are strict and must be stringently adhered to. You can also contact an attorney specializing in real estate tax reductions to assist you.

Joint Tenants and the Deceased Joint Tenant Affidavit

What happens if you own real estate jointly with someone (i.e as joint tenants with right of survivorship or as tenants by the entirety) and the other property owner dies? Who gets his or her half of the property? Did they want you to have it? How do you get it?

Don't worry, if the joint tenant dies, the property is yours. That is the purpose of joint tenancy -- if one owner dies the other owner(s) automatically get the ptoperty. But when it comes time to sell the real estate, the title company will be looking for proof that the joint owner has passed on, and a death certificate is not enough.

Fortunately, the process of removing a deceased joint tenant from title is simple. A form called a Deceased Joint Tenant Affidavit needs to be prepared by someone with knowledge of the facts (typically the surviving joint tenant), signed, notarized, and filed with the county recorder along with a death certificate.

If you fail to have this procedure completed after the death of the deceased joint tenant, you can do it at the time of the sale of the real estate. However, it is best to handle this immediately after the joint tenant's death to avoid complications in case you die before you sell the real estate, or in case you want to add another joint tenant to the real estate or modify title in any other way. Preparing a Deceased Joint Tenant Affidavit is simple and inexpensive, and can clear the way for a simple transition to your buyers or heirs.

Home Inspections for New Construction

Many buyers think that a professional inspection for a newly constructed home is unnecessary. After all, it's a new house -- everything is brand new and absolutely perfect, right? Wrong. I strongly urge all of my clients to obtain a professional inspection of any home they are purchasing, even it's just been built.

In the course of my work, I see inspection reports on homes that have been previously lived in, as well as new construction homes. The lists of defects, however, are pretty much the same in length regardless of the age of construction. In fact, new construction homes sometimes have a longer list of defects because there is no one living there to have found and fixed those defects yet. For example, a switch that is supposed to be wired to an outlet may not be working properly, or a shower diverter may leak. While the builder probably checked these items upon installation, he may well have missed them, especially if it is a large construction project with many units or homes. A professional home inspection, however, should uncover these issues and bring them to the seller's attention before it's too late.

Many builders do not include inspection contingencies in their contracts; however, these can be negotiated into the contract by your attorney. Larger builders, however, may not allow any inspection contingency in the contract at all. In such cases, the buyer should be wary. While most builders, large and small, encourage a pre-closing walkthrough to nail down any outstanding punchlist items, sometimes this is not enough. If a unit or home is ready for occupancy when you make your offer, I strongly recommend you schedule a home inspection immediately!

Calculating Capital Gains Tax for 1031 Exchanges

If you are selling property and involved in a 1031 exchange, you certainly want to know what your deferred tax liability is. The important thing to remember is that you are taxed on your gain, NOT on your profit and NOT on your equity. In other words, you can sell your property, have no profit and no equity, and still be subject to tax liability under the 1031 rules because there is a gain. How can you calculate what you might owe? Well, see an accountant. But if you're stubborn and you refuse to go to your accountant, here's a little formula that will point you in the right direction:

First of all, you need to calculate your Adjusted Basis. To do this, take your original purchase price, and then add the cost of your improvements (assuming you have not already claimed them as expenses). Then subtract any depreciation you have already taken, and you have arrived at your Adjusted Basis.

Next, subtract your Adjusted Basis from your current sales price. Then subtract your closing costs (i.e. title fees, real estate commissions, etc.). The number you end up with is your Total Gain on Sale.

Finally, take your Total Gain on Sale and make the following three calculations: 1) Multiply your Total Gain by the state capital gain tax rate; 2) Multiply your Total Gain by the federal capital gain tax rate; and 3) Multiply your Total Gain by the federal 25% tax rate. The sum of these three numbers is the approximate amount of taxes that you can defer through a 1031 exchange. There may be some additional deduction for state taxes.

I strongly recommend that before entering into a 1031 transaction, you speak to your accountant and make sure you understand the pros and cons of the 1031 exchange, and that you are clear about how much tax you are deferring! For more information on 1031 exchanges in general, please see here.

Tax Increases on Second Homes and Investment Properties

Up until now, if you sold your principal residence, you could pocket up to $250,000 in profit, tax-free (or $500,000 if you are married filing taxes jointly) as long as you were living in it for at least two of the last five years. In other words, if you owned rental or investment property and you moved in and used the property as your principal residence for at least two of the last five years, you could receive substantial profits tax-free upon the sale of the property. You could sell your home and move into your vacation property or rental unit for just two years, and still avoid paying capital gains tax.

Well, lawmakers have finally caught on. If you plan to buy, sell or live in an investment or rental property that you own after January 1, 2009, you will still be able to receive some of the profit from the sale of your rental or investment property tax-free, but not all of it.

The new tax scheme involves prorating the profit between the time you rented the property and the time you lived in it. If you rented out your property for a year (non-qualified usage, in IRS jargon), and then lived in it for three years (qualifed usage), and made $200,000 profit when you sold it, then 1/4 of your profit is subject to capital gains tax, and 3/4 is not. Anyone buying investment property that they intend to reside in for any period of time should speak with their accountant or tax professional immediately to see how these new rules will impact them!

Land Trust Basics

Periodically I come across a client who is interested in a land trust, but doesn't know all that much about it. Well, here you go, land trusts in a nutshell:

Land trusts are a fancy way to hold title to real estate; instead of holding title in your own name or in the name of your company, you can hold title in a land trust. There are basically two types of land trusts: 1) Land trusts that are administered by a bank (typically for an annual fee of a few hundred dollars) and 2) Land trusts that you can administer yourself, with the help of an attorney who can set it up for you.

There are a number of advantages to having a land trust:

1) Land trusts can be useful estate planning tools, especially for smaller estates.
2) Land trusts allow the transfer of property quickly upon your death. The property can be transferred to your heirs per the terms of your land trust immediately without having to go to court.
3) Land trusts avoid probate -- not for your estate in general, but at least with respect to the property held in the land trust. If you have a relatively small estate which is tranferred through joint tenancies or payable on death accounts, then you can simply put your house in a land trust, and your heirs can avoid the entire probate process in court.
4) Land trusts are relatively inexpensive.
5) If you purchase property and put it directly in a land trust, without ever having owned it in your own name, your nosy friends and neighbors will not be able to figure out what you own by searching your name in public records databases.

Of course, land trusts have their disadvantages too:

1) Land trusts are poor estate planning tools for large or complex estates, unless they are simply a small component of a larger, more comprehensive estate plan.
2) Land trusts are a poor estate planning tool when the beneficiaries of a particular piece of land are likely to squabble or have disputes. The trustee of a land trust has very little discretionary authority when compared to the trustee of your average living trust, making such disputes more difficult to resolve.
3) Land trusts should not be used when leaving real estate to minors.
4) While land trusts are relatively inexpensive, there is some cost involved. If you set up your land trust through your bank, you will have to pay an annual fee. If you hire an attorney to set it up, you will have to pay to draft the land trust.

If you are not sure whether a land trust is the right option for you, contact your attorney for his or her opinion. A professional familiar with real estate and estate planning should be able to guide you properly.

Home Purchase Tax Credit for Buyers!

Congress passed a new bill last week, and if you're buying a home and meet all of the following requirements, you're in for a sweet deal:

1) You don't own a home now, and have not owned a home in the last three years;
2) You closed on the home you're buying after April 9, 2008, or, if you haven't closed yet, you will close before June 30, 2009;
3) You are a U.S. Citizen or resident alien;
4) You did not finance the property using a tax-exempt bond mortgage; and
5) You are using the property you are buying as your primary residence.

If you meet all of these requirements, you can can claim a credit of up to 10 percent of your purchase price, up to $3,750 (or up to $7,500, if you are married filing taxes jointly), on your 2008 or 2009 taxes. If your adjusted gross income is over $75,000 (or $150,000 for married couples), then this tax credit begins to phase out.

There is a catch, however. You do need to repay the tax credit starting in the second tax year after you bought your home, making pro-rata repayments for up to 15 years. But the payments are not that much: for example, if you were eligible for the full $7500 credit, you would pay $500 a year for 15 years. That's basically an interest-free loan! Moreover, if you sell the home at no profit, you don't have to pay the balance you owe from the proceeds you get from the sale.

So if you're looking to buy and meet all of the above requirements, get a move on! You can buy any home you want -- house, condominium, townhouse, new, old, even if it's falling apart and you need to fix it up yourself. It's not often the government gives out interest-free loans!

Condominium Assessments When Buying Foreclosures

As more and more of my clients are buying foreclosed properties, the question of who is responsible for paying unpaid condo assessments keeps coming up. Buyers feel that it should not be their problem; after all, they didn't own the property when the assessments became due. Associations, on the other hand, want their money; they don't particularly care where it comes from. Because homeowners' associations require payment of assessments by all unit owners in order to meet their budget and keep their property in good repair, the Illinois legislature has sided with them on this issue.

The Illinois Condominium Property Act states that if you buy foreclosed property from the bank, you are responsible for assessments for the six months immediately prior to when the association instituted legal action to collect the assessment, assuming that such assessment is still unpaid. Take note: if the homeowner did not pay assessment for more than six months before the association took legal action, you are still only liable for six months' assessments. If the association never took legal action, you are not responsible for the assessment at all. In fact, I've had a few clients benefit because they were purchasing a foreclosed condo in an association that never filed suit for past due assessments.

The bank that foreclosed the condo is liable for assessments from the first day of the month after the month in which the foreclosure took place, through the date you close on your purchase from the bank.

What happens if the condominium association has instituted a special assessment? Well, your attorney can negotiate with the bank's attorney and try to get you the best possible deal. Unfortunately, many lenders have form contracts they require buyers to sign, which state that the buyer shall be responsible for all special assessments. Some lenders are willing to negotiate some of the terms of the sale; others are not. When a bank does not have its own form, the buyer benefits because the buyer's offer typically is on a standard realtor form, and those forms state that the seller is responsible for special assessments.

Make sure you understand how much assessment you will owe at closing if you're purchasing foreclosed property from a bank!

Illinois Residential Real Property Disclosure -- What happens if the seller does not provide one?

The law states that if the seller of residential property in Illinois fails or refuses to provide the Illinois Residential Real Property Disclosure prior to the sale of the property, the buyer has the right to terminate the contract (765 ILCS 77/55). This is bad news for sellers -- what if they simply forgot to provide the disclosure? The law doesn't care. It doesn't matter why the seller didn't provide the Residential Real Property Disclosure or whether he was acting in good or bad faith. As long as the seller did not give the disclosure to the buyer, the buyer can opt out of the transaction.

While this issue is not litigated often, it did come up just recently. In Muir v. Merano, 378 Ill.App.3d 1103 (5th Dist. 2008), the buyer repeatedly asked the seller for the disclosure statement, but the seller never delivered it. The buyer then terminated the contract pursuant to state law based on seller's failure to provide the Illinois Residential Real Property Disclosure. Seller refused to return all of the buyer's earnest money, stating that he would only only return half of it. As a result, Buyer sued.

In court, the seller argued that since the statute does not state a timeframe for providing the disclosure, seller should be allowed to provide the disclosure just prior to or at closing. The court disagreed, stating that the purpose of the Illinois Residential Real Property Disclosure Act is to give prospective buyers the same knowledge of defects in the home that seller has, allowing the buyers to make an informed decision about whether or not to purchase. If the buyer does not receive the disclosure until just before or at closing, it is too late -- the buyer is already committed to purchase.

So if you are selling your home or rental property, where do you get the Illinois Residential Real Property Report? If you have a real estate agent, he should give one to you. If not, your attorney can provide it. It is imperative that as a seller, you complete and sign this document and give it to your potential buyer.

Lastly, the Illinois Residential Real Property Act clearly states that anyone who knowingly makes false statements on the disclosure shall be liable in the amount of actual damages, court costs, and attorneys' fees. The disclosure should be completed honestly and in good faith. It is better to address problems up front than end up in court later!

As-is Contract Purchases: Buyers Beware

Typically, even when you buy property "as-is", the seller has a duty to disclose latent material defects. Furthermore, if the seller misrepresents facts to the buyer, the buyer has the right to sue after closing. But buyers beware, a recent Illinois case has held that if you agree to buy property as-is, you are really buying it as-is, and if you learn something about the condition of the property after closing and decide to go after the seller for failing to tell you about it, you may very well lose. Kopley Group V, LP v. Sheridan Edgewater Properties, Ltd., 376 Ill.App.3d 1006 (1st Dist. 2007) illustrates this point.

In Kopley, the buyer purchased a large residential/commercial building as-is. The contract allowed the buyer time to inspect the property, and if the buyer was not satisfied after his inspections, he could cancel the contract and receive a full refund of his earnest money. The buyer chose not to complete any professional inspection of the property.

After the closing, the City of Chicago cited the buyer for various defects at the property, including structural defects, which the buyer repaired at considerable expense. The buyer then sued the seller for breach of contract and for fraudulent and negligent misrepresentation. The buyer asserted that the seller should have disclosed information related to the city's previous inspections of the property and the repairs the seller had completed.

With respect to the buyer's first claim, breach of contract, the court decided in favor of the seller. The contract had an as-is provision and the buyer had enough time to complete an inspection, which he chose not to do. The court stated that the seller did not breach the contract.

With respect to the buyer's second claim, fraudulent and negligent misrepresentation, the court again favored the seller. The seller had made no representations about the structural condition of the property that buyer relied on. Additionally, the buyer had reviewed documentation relating to quotes for certain repairs on the property during the inspection period, and one of these documents was a quote for repairing the shifted brick lintel of the building. Therefore the court stated that the buyer had knowledge of the structural condition of the building, and Seller had not attempted to misrepresent it.

Why is Kopley at odds with other Illinois cases? Well, we can't be sure, but it could be for a number of reasons. Perhaps it was because the buyer in Kopley was a sophisticated party with experience in commercial real estate transactions, as opposed to someone who is just buying a home and may not know much about real estate. Or it could have been because the parties explicitly bargained for and agreed to the as-is provision of the contract. Regardless of the reason, the case is now out there and on the books. If you are buying property as-is, make sure you inspect the property and review all relevant documentation diligently to prevent being in a Kopley situation!

New IRS Rules for 1031 Exchanges in Counties Suffering Storm Damage

Because of the severe storms, flooding and tornadoes in the midwest, the IRS is providing extensions to people or entities attempting a 1031 exchange in certain affected counties in Illinois, Indiana, Iowa, Missouri and Wisconsin. These extensions will allow people to search for or close on appropriate exchange properties without missing the strict IRS deadlines (45 days from the date of your original sale to identify exchange property, and 180 days from the date of your original sale to close -- for more general information on the 1031 exchange process, click here).

So who is eligible for these extensions? Well, first of all, you must be an affected potential exchangor. An affected potential exchangor is anyone (a) who lives in or has its primary place of business in one of the affected counties (see the list below) or (b) who keeps his books or records in an affected county, or (c) whose tax professional's office is in an affected county. Second, you must have sold or exchanged your property prior to the effective disaster date (June 1, 2008 in Illinois). Third, your 45-day identification deadline or your 180-day closing deadline must fall on or after June 1, 2008. If you meet all three of these conditions, you will receive a 120 day extension of any 45-day or 180-day deadline that falls after June 1, 2008.

Which counties are considered affected counties? In Illinois, Adams, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Lake, Lawrence, Mercer and Winnebago counties are all affected counties. There is a possibility that more counties will be added later. Cook County is not considered an affected county.

All other standard conditions that apply to 1031 exchanges (see here) must be met regardless of any extension allowed. The IRS is trying hard to be flexible and allow people who suffered recent storm damage to get back on track. People who are eligible for the extension and still wish to complete a 1031 exchange should act promptly!

Long time, no lawyer joke. . .

It's been a while since I posted any legal humor. Most of us lawyers can take an occasional jab at our profession. Here's one someone sent me recently, though I have no idea who wrote it!

After his graduation from college, the son of a reknowned lawyer was considering his future. He went to his father and asked if he might be given a desk in the corner from which he could observe his father's practice. His observations would help him decide whether or not to become a lawyer. His father thought this was a great idea and immediately agreed.

The first client the next morning was a tenant farmer -- a rough man with calloused hands who was dressed in workman's clothing. He said, "Mr. Lawyer, I work for the farm on the east side of town. For many years I have tended their crops and animals, including some cows. I have raised the cows, fed them and looked after them. And I was always told that I was the owner of these cows. Now the farmer has died and his son has inherited the farm. He believes that since the cows were raised on his land and ate his hay, the cows are his. In short, we are in dispute over who owns the cows."

The lawyer said, "Thank you. I have heard enough. I will take your case. Don't worry about the cows!"

The next client to come in was a young and well-dressed man. He said, "I own the farm on the east side of town. We have a tenant farmer who has worked for my family for many years, tending crops and the animals, including some cows. I believe the cows belong to me because they were raised on my land and were fed my hay. But the tenant farmer believes they are his because he raised them and cared for them. In short, we are in dispute over who owns the cows."

The lawyer said, "Thank you. I have heard enough. I will take your case. Don't worry about the cows!"

After the client left, the lawyer's son could not help but express his concern. "Father, I know very little about the law, but it seems we have a conflict of interest, not to mention a very serious problem concerning these cows."

"Don't worry about the cows!" the lawyer said. "By the time we're done, the cows will be ours!"

Enterprise Zones and Losing a City of Chicago Transfer Tax Exemption -- Ouch!

Recently I heard about a case that made its way to appellate court last year. The case involved an Enterprise Zone. What is an Enterprise Zone? Well, the City of Chicago has designated certain geographical areas in the city as Enterprise Zones. If you are a business in the Enterprise Zone, the city provides you certain benefits, including tax incentives, in order to encourage the growth of your business. If you purchase commercial property in an Enterprise Zone and continue to use it for commercial purposes, you are typically exempt from paying the hefty City of Chicago transfer tax.

Some time ago, a Buyer in Chicago bought commercial property within an Enterprise Zone. Under the Enterprise Zone Program, the Buyer did not pay any transfer tax to the city. He also did not take occupancy of the property at closing. Rather, he leased it back to the Seller for a period of eleven months, in which the Seller continued to operate the same business as prior to the sale. That's continued commercial use, right? Wrong.

The City of Chicago reviewed the transaction and determined that such temporary "continued" use was not sufficient to fall within the purview of the Enterprise Zone program. The key factor in the city's decision was the Buyer's intended use of the property, which was to turn the parcel into residential condominiums. Even though that may have been the Buyer's business and was a commercial use to him, once a property is converted to condominium or residential use, it is no longer commercial property and is ineligible for the Enterprise Zone Program. The case was appealed and the city eventually won. Metro Developers, LLC v. City of Chicago Department of Revenue, 377 Ill.App.3d 395 (1st Dist. 2007).

So why did I include the word "ouch" in the title to this post? Because the City of Chicago transfer tax is no joke -- the Buyer's share of the transfer tax is $7.50 for every thousand dollars of the purchase price. The purchase price in the above case was $5,900,000.00. That translates into $44,500.00 in transfer tax, from the Buyer alone! Ouch!

What happens to your house if you die?

This question comes up a lot in my practice, both in terms of real estate and estate planning. For most people, their home is their largest investment. Moreover, people are often emotionally attached to their home. They want to make sure that their home is protected as much as possible, and they want to be certain that it passes to their spouse, children or other family members.

The simplest way to control who gets your home or the proceeds from its sale upon your death is to prepare an estate plan. Your attorney will explain which estate planning options are best for you based on your individual needs. You can control the distribution of your home within a properly drafted will, trust, or land trust. In most situations, you will not need to re-draft your will or trust if you sell your home and purchase a new one.

Additionally, as part of an effective estate plan to protect your home, you may consider buying a life insurance policy that will be sufficient to pay off the outstanding debt on your home in the event of your death. If you are leaving your home to family members who reside there and who depend on you to pay the mortgage , they could be left out in the cold if they cannot afford the montly payments. Funds from your life insurance could keep your loved ones in their home.

If you don't have an estate plan, then the laws of intestacy apply to your home and to your estate in general. What happens to your home depends on your individual situation. For example, if you are married and own your home jointly with your spouse, your home passes automatically to your spouse upon your death. If your spouse pre-deceases you, your home and estate will be transferred to your heirs at law -- either your children or your parents or your siblings or other family members -- depending on your personal circumstances. If your spouse inherits the home and later dies without an estate plan, the home will be passed to his or her heirs; in other words, if you have no children, then your spouse's relatives could inherit your home. If you have never been married and own a home solely in your name, then your heirs at law are your parents or your siblings and then your other relatives -- again, this depends on your personal circumstances. If you have no heirs at law, a local municipality may step in and take possession of your home. For example, in Cook County, the Cook County Public Administrator's Office takes over such homes and eventually auctions them off. It never fails to surprise me that so many homes are lost in this way every year, when all the owner had to do to protect the home and his heirs was prepare a will or other estate planning document.

Every homeowner should know how their property is deeded, and what will happen upon their death. Dig through those old papers and find the deed from when you purchased your home. If you ever prepared an estate plan, look through it and make sure your home, your prized possession, is being dealt with in the proper manner. If you do not have an estate plan, now is the time to prepare one. Not only can a thorough estate plan protect your family's place of residence, but it can protect your family too.

Cook County Predatory Lending Database Program -- What is it?

Real estate buyers will soon have to contend with new procedures regarding predatory lending in Cook County. Because of the increasing numbers of homeowners falling behind on mortgage payments and record foreclosure rates, the Illinois legislature has enacted a new measure, Public Act 95-691, aimed to protect the borrower in certain loans that can be considered "high-risk". This new measure is effective July 1, 2008. Even if the new procedures do not apply to your loan, in order to record a mortgage in Cook County you will still need to file a Certificate of Exemption, stating that the loan is exempt from the requirements of Public Act 95-691. Your attorney and the title company will assist you with this at closing.

So what kind of loans do fall within the purview of the Cook County predatory lending program? Will it affect you as a buyer? It may, if you and/or your loan meet the following criteria:

1) Your mortgage broker or loan originator is subject to the Residential Mortgage License Act, and is licensed by the Illinois Department of Financial and Professional Regulation, AND

2) You are a first-time homebuyer and are purchasing 1-4 unit residential property in Cook County that you will live in. Note that if there is more than one buyer, then the loan is only subject to the predatory lending program if ALL buyers are first-time homebuyers, AND

3) Your loan falls into one or more of the following categories: a) You are allowed to make interest-only payments; and/or b) Your loan could result in negative amortization; and/or c) The fees and points you pay in order to close are greater than 5% of the value of the loan; and/or d) Your loan has a prepayment penalty; and/or e) You are getting an adjustable rate mortgage where the interest rate can change during the first three years.

If you fall into categories 1 and 2 and 3 above, your mortgage broker must enter your loan information into a database maintained by the Illinois Department of Financial and Professional Regulation, and you will be subject to counseling. Your mortgage broker will direct you to an approved counselor in your area, and should also bear the cost of the counseling, if any. If you refuse to attend counseling, you cannot proceed with your purchase if you require a mortgage. If you do obtain counseling, then even if the counselor advises you not to proceed with the loan, the final decision is yours. You may proceed against the counselor's advice if you wish, althought this is not recommended. If you choose to continue with your purchase, a Certificate of Compliance will be issued at closing, stating that you have met the counseling requirement. Either this document or the Certificate of Exemption, as described above, must be presented in order to record a mortgage in Cook County.

So will there be any practical benefits to the new predatory lending program? Well, theoretically there should be a decrease in predatory loans, leading to a corresponding decrease in missed mortgage payments and foreclosures. Whether or not this actually plays out is yet to be determined!

Mortgage Contingency Clause -- Why is it important?

Almost every real estate contract that comes across my desk includes a mortgage contingency clause. My clients always have tons of mortgage-related questions for me, many of which I am not qualified to answer since I am not a mortgage broker or in the lending business. But when I represent a buyer during a real estate transaction, I always explain the legal ramifications of the mortgage contingency to him. Moreover, I have to protect my client's interests with respect to their loan, and it helps if they understand why.

The mortgage contingency period (also known as the mortgage commitment period or the mortgage approval period) is extremely important to the buyer. Just like the attorney approval and inspection periods, a mortgage contingency period is just that -- a contingency. The contract is contingent on the buyer obtaining a loan, typically within three to five weeks after the contract is executed (although the term could be shorter or longer). Most form real estate contracts include some language protecting the buyer's ability to obtain financing. Developers' contracts, on the other hand, tend to have more limited mortgage commitment language that favors the builder.

A buyer or his attorney need to look for the following points to make sure the buyer is protected -- a) There must be enough time to obtain a loan commitment; b) The buyer should specify the maximum interest rate he is willing to pay; c) The buyer should clarify whether or not he is willing to pay points to obtain a more favorable interest rate; and d) The contingency should specify that the Buyer needs to obtain a FIRM mortgage commitment, not just any mortgage commitment. A commitment which is not firm includes conditions that must be satisifed prior to final loan approval. In today's lending market, a commitment pretty much means nothing until there are no outstanding conditions.

On the date that the buyer's mortgage contingency expires, one of the following three things should happen: 1) The buyer has a firm mortgage commitment that he is satisfied with in his hands; 2) The buyer's attorney asks for an extension of the mortgage contingency period because the buyer's loan is still being processed; or 3) The lender has denied the buyer's loan, in which case the buyer's attorney sends a copy of the rejection letter along with a request to cancel the contract and return the buyer's earnest money. If the buyer doesn't have a firm mortgage commitment and fails to notify the seller as stated above, he is bound to purchase the property. There have been many instances where a buyer failed to request an extension and was later unable to obtain financing. In such situations, buyers typically lose their earnest money. Technically, buyers can also be sued for specific performance, i.e. to complete the transaction. But the reality is that most sellers understand the buyer doesn't have the money to complete the purchase, which is why such litigation is uncommon.

Buyers should actively follow up with their lenders throughout the transaction. In fact, for a smooth closing, all parties to the transaction should communicate regularly!

1031 Exchange -- The Basics

What is a 1031 exchange? What are its pros and cons? Clients ask me this question at least a couple of times each month, and I think it's time for a simple answer.

With respect to real estate transactions, a 1031 exchange is a way for you to sell your investment property and use those funds to buy another investment property, without paying any capital gains tax on the property you sold for the time being. Pursuant to Internal Revenue Code Sectin 1031, the real estate you sell and the real estate you purchase must both be in the United States to qualify for a 1031 exchage. Sounds great, right? But there are a few things you should be aware of:

1) A 1031 exchange must be arranged prior to the closing of your sale. Your real estate attorney should be notified in advance so she can make arrangements for the title company to transfer funds directly to one of the many companies that handle 1031 exchanges. These companies are known as Qualified Intermediaries. Paperwork must be completed at or prior to the closing by both parties to the transaction, and you will have to pay a fee to the Qualified Intermediary. You CANNOT take the proceeds of the sale home with you, or have it wire transferred to your account, and then decide later that you want to do a 1031 exchange. For the exchange to be valid, the funds must be transferred to a 1031 company at closing.

2) Within 45 calendar days of your closing, you must identify up to three properties that you are interested in purchasing with your 1031 money. If you would like to, you can identify more than three properties, but then you are subject to the 200% rule, which means that that the total value of everything you identify has to be less than twice the value of the property you have sold. If you don't identify any properties within 45 days, the 1031 exchange fails and you can request the Qualified Intermediary to refund your money. If you identify properties and later decide you don't want to purchase any of them, you must wait until 180 days have lapsed from the time you sold your property to get your money back.

3) The closing of any new property or properties that you are purchasing using the the 1031 money MUST close within 180 calendar days of the property you sold. If you do not close within that time frame, the 1031 exchange fails, and you can request the Qualified Intermediary to refund your money.

4) The same entity that sold the initial property must be the buyer of the new property. For example, Joe Investor sells his apartment building and deposits the money with a Qualified Intermediary to do a 1031 exchange. Joe finds a shopping plaza he is interested in purchasing, and decides to form a company, Superstores LLC, to purchase the shopping plaza. Joe cannot do this. If Joe Investor sold the building, Joe Investor must be the buyer of the shopping plaza. This requirement makes it especially difficult when a company with multiple owners sells a property. Oftentimes, one of the owners wants to complete a 1031 exchange, but the other owners do not.

5) The new property or properties must be of equal or greater value than the property sold. So if Joe Investor sells his apartment building for $500,000 and has $200,000 in proceeds that he deposits with a Qualified Intermediary, Joe must spend at least $500,000 on the next investment property he purchases if he plans to complete a valid 1031 exchange. If he spends less, he will have to pay taxes on the difference between $500,000 (his sales price) and the price of the new property he is acquires.

6) Contrary to popular belief, a 1031 exchange is not a way to avoid taxes. Rather, it is a way to DEFER taxes. So while you increase your buying power now, someday you will end up paying all of the capital gains tax you avoided along the way. That can be a hefty chunk of money that becomes due all at once. Additionally, if the capital gains tax rate increases over time, you could end up paying more taxes in the future than you would have if you had paid the tax along the way.

Unfortunately, that's not all; this article is just a very basic overview. The 1031 rules are very complex and each situation requires individual attention. The smallest mistake can cause your 1031 exchange to fail, making you liable for the capital gains tax you thought you didn't have to pay this year.

City of Chicago Leases -- Landlords Beware

Whether you lease out one unit or dozens, if you are a landlord in the City of Chicago, you must be careful to adhere to the requirements of the Chicago Residential Landlord and Tenant Ordinance (Municipal Code Title 5, Chapter 1). All residential rental units in Chicago are covered by this Ordinance, except those in owner-occupied buildings with less than six units, dormitories, hotel or motel rooms, hospital rooms, residential living space provided by an employer to an employee, and any residential unit in which the tenant is under contract to purchase the space from the landlord. The Ordinance specifies the landlord's obligations and the tenant's remedies for landlord's failure to act as required by law. In order to avoid costly lawsuits from litigous tenants, a landlord should utilize a proper Chicago apartment lease that takes the Ordinance into account.

Landlords must be especially careful when dealing with the following lease-related issues:

1) When receiving a security deposit, the landlord must provide a written, signed and dated receipt of the security deposit. The receipt should include the landlord's name and the address of the property that is subject to the lease. If the landlord fails to provide such a receipt, the tenant is entitled to an immediate return of the security deposit.

2) The landlord must hold the security deposit in a segregated account and pay the interest accrued on it every twelve months. Furthermore, within forty-five days after the lease ends, the landlord must return the security deposit, minus unpaid rent and a reasonable amount for repairs if the tenant damaged the unit. Otherwise the tenant may be awarded twice the security deposit, plus interest.

3) The landlord must provide his or his management company's name, address, and phone number when the lease is signed, or the tenant may terminate the lease. If the tenant requests this information and the landlord fails to provide it, the landlord can become liable for additional damages.

4) Any late payment fees cannot be greater than $10 per month for the first $500 in rent, plus 5% of any amount in excess of $500. If the landlord attempts to enforce a late fee in excess of this amount, the tenant may recover up to two months' rent.

5) If a landlord enters a tenant's unit unlawfully, the tenant can obtain injunctive relief or terminate the lease.

These are just some of the items that a Chicago landlord should be aware of prior to entering into any lease. Indeed, anyone interested in renting out property in Chicago should familiarize themselves with the Ordinance to avoid running afoul of it. Penalties assessed against landlords can be severe, and landlords should proactively review their leases to ensure compliance with city law.

Transferring the Condominium Association from the Developer to the Homeowners

This week’s post is an amalgamation of two ideas – a client’s suggestion about a possible blog topic, and an idea I had after speaking with another client who is concerned about the transfer of management at her new association. If there is a topic you are interested in hearing about, please do not hesitate to let me know!

The Illinois Condominium Property Act requires developers to turn over control to condominium owners within sixty days after 75% of the condominium project is sold, or in the alternative, three years after the condominium declaration was recorded. When all parties are working together and the developer has kept proper documentation, turning over control to the homeowners is a clear-cut process.

First of all, upon at least three weeks’ notice to all homeowners, the developer has to call a meeting to start the election process for the first Homeowners’ Board. If the developer fails to do so, so long as at least twenty percent of the homeowners are in agreement and they provide notice to the developer, the homeowners can call the first meeting. Regardless of how the meeting is called, the developer may only continue to manage the association for a maximum of another thirty days after the first meeting. During that time, the homeowners should elect the first Board.

In the meantime, the developer should assemble all of the documents he will need to transfer to the new Homeowner’s Board. The developer should provide original copies (or certified copies, if originals are lost or unavailable) of the recorded Condominium Declaration and Bylaws, incorporation documents from the Secretary of State, Rules and Regulations (if any), Annual Reports, and contracts and leases affecting the condominium association. The developer should also prepare a list of all personal property owned by the association, if any, and describe where that personal property is located. If the association is involved in any litigation, governmental proceedings, or disputes with homeowners, full disclosure should be made to the new board. A copy of the association’s insurance policy should be included, as well as a copy of all tax bills available. And of course, the developer must provide a complete and thorough accounting of the association’s income and expenses during the time the developer or his agent was managing the condominium association. All of these documents must be provided to the new Board within sixty days of the new Board’s election.

In order to manage the association, the developer may have contracted with a management company, scavenger service, snow plow service, landscapers, handymen, or other contractors. In fact, developers often hire their own affiliates to complete many of these jobs during the time the association is under developer control. Based on the rates and/or the quality of these services, the new Board may wish to cancel some of these services and hire its own contractors. Under Illinois law, the Board can cancel any of these contracts within six months of its election, so long as the contracts extend for at least two years after the date of election.

Once the new Board takes over, it has a fiduciary duty to the other homeowners at the association. Because operating a homeowners’ association is a significant and time-consuming responsibility, and because it sometimes causes discord between neighbors, many boards relinquish these duties to a management company. Other associations choose to avoid the expense of a management company and self-manage the property. Regardless of the method of management, good bookkeeping and thorough accounting is needed for all associations.

Lastly, when a developer turns over control to the Homeowner’s Board, he is not absolved of his contractual and warranty obligations. Homeowners who have outstanding punchlist items or are still within the warranty period should continue to contact the developer for these repairs.

Section 22.1 Disclosures – A Must for Condo Buyers

When purchasing a condominium, buyers must be extra-careful. Condominiums are a form of common ownership, and come with their own set of challenges. Condominium Declarations/Bylaws and Rules and Regulations govern condo living, and must be followed to avoid fines, liens, and friction with the neighbors. Before purchasing a condominium, buyers should be diligent to make sure that they are comfortable with their purchase.

Pursuant to Section 22.1 of the Illinois Condominium Property Act, the seller of a condominium is required to provide certain documents to a prospective purchaser. By reviewing these documents thoroughly, buyers can avoid surprises at or after closing. For example, the Condominium Declaration/Bylaws and Rules and Regulations typically explain condominium governance, management, and items that will affect the condominium owner daily, such as rules concerning pets, noise, renting units, parking, etc. The condominium budget will lay out how much money the association collects and spends every year, and how much debt the association has. Buyers may not be interested in purchasing property that carries substantial debt for which they will have to pay special (translate: extra) assessments on a monthly or annual basis. Sellers also must provide past meeting minutes for the buyer’s review. Meeting minutes may reveal financial or maintenance issues that the association currently has or may have in the near future.

Additionally, a Section 22.1 Disclosure form is typically completed by the condominium board or the management company of a resale condominium. The form confirms the assessment, notifies prospective purchasers of any pending special assessments, states whether or not the association has any liens or lawsuits against it, and provides insurance information for the association. In most circumstances, immediately after a contract is signed, the buyer’s attorney will request a copy of the Section 22.1 Disclosure and related documents. Buyers will usually have a few days after receipt of these documents to determine whether or not they want to proceed.

If a condominium is being sold for the first time, i.e. it is either new construction or a condo conversion, the rules are slightly different. In addition to the Condominium Declaration/Bylaws, Rules and Regulations, and budget, developers must provide a drawing of the unit being purchased. If the building is large enough, the seller may also need to provide a Property Report highlighting the pros and cons of the building’s construction.

A thorough review of the documents required under Illinois law is necessary to assist buyers in making informed decisions regarding their purchase and to determine whether a particular condominium community is right for them.

Developer / Builder Contracts – Pitfalls for Buyers

When buying a property from a developer, buyers are typically asked to sign a special contract, prepared by the developer in advance. The vast majority of developers will not accept any of the realtor-prepared forms that are widely used throughout Illinois. Developers are subject to certain Illinois laws and want to use their own contracts to avoid various liabilities.

Prior to signing a developer’s contract, you should look through the contract and familiarize yourself with it. Developers’ contracts are notoriously one-sided, especially with respect to tax credits, property inspections, mortgage contingencies, resale provisions, warranty restrictions, and closing dates. Traditionally developers have been unwilling to negotiate. Because of the changing market conditions, however, more and more developers are working with potential buyers to make the sale.

If the legal jargon in the contract seems like mumbo-jumbo, the buyer shouldn’t fret unnecessarily. Instead, he should make sure that there is at least a five-day attorney review provision in the contract. While most Illinois developers do include an attorney review provision, many do not. Usually, however, they will add an attorney review provision upon your request. As long as that provision exists, the buyer’s attorney can review and negotiate some of the one-sided elements in the contract. This also affords the buyer a few days to make sure he is not experiencing “buyer’s remorse”. If the buyer is uncomfortable with the contract after his attorney explains it to him, the buyer’s attorney can terminate it within the attorney review period.

Don’t be scared to sign a developer’s contract! Just make sure you are taking steps to protect yourself and that you understand the contract and what your risks are.

Building Noah's Ark Today

I thought I would post a bit of "law humor" this week. I don't know who originally wrote this piece, but it was sent to me some time ago:

In the year 2008, the Lord came unto Noah, who was now living in the United States, and said, "Once again, the earth has become wicked and over-populated, and I see the end of all flesh before me. Build another Ark and save 2 of every living thing along with a few good humans."

He gave Noah the blueprints, saying, "You have 6 months to build the Ark before I will start the unending rain for 40 days and 40 nights."

Six months later, the Lord looked down and saw Noah weeping in his yard - but no Ark.

"Noah!" He roared, "I'm about to start the rain! Where is the Ark?"

"Forgive me, Lord," begged Noah, "but things have changed. I needed a building permit. I've been arguing with the inspector about the need for a sprinkler system. My neighbors claim that I've violated the neighborhood zoning laws by building the Ark in my yard and exceeding the height limitations. We had to go to the Development Appeal Board for a decision.

Then the Department of Transportation demanded a bond be posted for the future costs of moving power lines and other overhead obstructions, to clear the passage for the Ark's move to the sea. I told them that the sea would be coming to us, but they would hear nothing of it.

Getting the wood was another problem. There's a ban on cutting local trees in order to save the spotted owl. I tried to convince the environmentalists that I needed the wood to save the owls - but no go!

When I started gathering the animals, an animal rights group sued me. They insisted that I was confining wild animals against their will. They argued the accommodation was too restrictive, and it was cruel and inhumane to put so many animals in a confined space.

Then the EPA ruled that I couldn't build the Ark until they'd conducted an environmental impact study on your proposed flood.

I'm still trying to resolve a complaint with the Human Rights Commission on how many minorities I'm supposed to hire for my building crew.

Immigration and Naturalization is checking the green-card status of most of the people who want to work.

The trades unions say I can't use my sons. They insist I have to hire only union workers with Ark-building experience.

To make matters worse, the IRS seized all my assets, claiming I'm trying to leave the country illegally with endangered species.

So, forgive me, Lord, but it would take at least 10 years for me to finish this Ark."

Suddenly the skies cleared, the sun began to shine, and a rainbow stretched across the sky. Noah looked up in wonder and asked, "You mean you're not going to destroy the world?"

"No," said the Lord. "The government beat me to it."

Short Sale Basics -- A Primer

Short sales are becoming more and more common these days. Every week I seem to have another client who has become involved in a short sale, whether on the sale side or the purchase side, and is completely bewildered by the process. So what is a short sale? How does it work?

A short sale comes into play when you have someone who is trying to sell real estate, but cannot get an offer that is sufficient to cover the mortgage owed on the property. For example, Seller A might own a property with an outstanding mortgage of $175,000, but Seller A is unable to sell the property for at least that amount. Not only that, Seller A can no longer afford the mortgage, taxes and other costs associated with keeping the property. Seller A is not making loan payments and knows that he is on the road to foreclosure. Instead of going that route, Seller A can call up his bank and ask them to consider a short sale. If the bank agrees, the bank may eventually accept a reasonable offer that is less than the outstanding loan balance.

Banks are overwhelmed by short sale applications these days. In order for a bank to consider a property for short sale, they require a great deal of financial documentation from the seller, as well as a bona fide offer to purchase the property. Even after submitting all of the required paperwork, banks typically take from 1-6 months to make a decision on the file. During that time, the responsible party needs to constantly follow up with the bank and make sure the process is on track. Banks these days are notorious for losing their client's short sales' files.

Some banks will eventually respond with a counter-offer; other banks prefer to see your best offer up front and don't negotiate much. If a buyer is in a hurry to move, short sales are not the way to go. There is no guarantee that a bank will ever agree to the price, even if the seller has. And often times, after months of going back and forth, the bank will turn down the buyer's best offer. In fact, if the seller has two loans from two different banks, the secondary bank with the junior lien is often unwilling to negotiate, despite the fact that if the property is foreclosed, the junior lienholder will not receive anything. This is becoming a greater problem these days, and is an additional factor in the increasing foreclosure rate.

Short sales are often an attractive deal for buyers regardless of the time it takes to close. Buyers have an opportunity to obtain property that they could not afford otherwise, often at just 75-85% of the original price. Banks are not in the business of managing property, and they are often willing to sell the property at a loss in order to avoid the hassles of property ownership. Savvy buyers are on the lookout for short sales in the neighborhoods they are considering. So if you're a buyer and you're interested, meet with a real estate agent who can help you find a short sale bargain!

City of Chicago Real Estate Transfer Tax Goes Up!

For years I've had buyers complain to me about the City of Chicago's transfer tax. At $7.50 per thousand dollars of sales price, it was already one of the highest real estate transfer taxes in the state. For example, if you were buying a property in Chicago for $250,000, your transfer tax would have been $1875. That's quite a bit more money for a buyer to budget for closing. But if you were hoping to get that bargain rate, today is the last day! Tomorrow, April 1, 2008, the tax goes up to $10.50 per thousand dollars of sales price, and that is no April Fool's joke.

There is a silver lining, however, but only for buyers! The extra $3.00 per thousand is the responsibility of the seller. So using our previous example, the tax on a $250,000 property is now $2625. The buyer is still paying $1875, and the seller owes the balance of $750. Needless to say, sellers are not too happy about this; my clients are pointing out that they paid the transfer tax when they purchased, and they feel it is unfair to have to pay it again. Condominium developers are particularly upset -- as it is, they have been slashing prices right and left, and now they've got an additional cost to cope with.

However, if the City of Chicago had charged buyers for the additional tax, it would have further depressed real estate sales. The last few years, during the peak of the real estate market, Chicago was receiving a great deal of funds from the transfer tax. City budgets rose accordingly. Now that sales have gone down, the City has to find a way to make up the shortfall. In addition to increasing the transfer tax, for example, the City also now requires people selling condominiums to obtain water certifications from the city for approximately $50. Since condominium associations pay the water bill for the whole building, condominiums were previously exempt from this requirement. The water certification for condominiums is essentially useless except in rare circumstances, but it helps to fill the city coffers.

Regardless of the increased cost, I have found that the joy most of my clients feel when finding a buyer, in today's market, far exceeds their aggravation at the additional costs of sale!

Prices drop again, surprise surprise

Every single month I see the same article in the Chicago Tribune, making the exact same point -- Prices for home sales across the country are significantly lower now than they were this same time last year. I'm tempted to go back and see if they are changing anything beyond the actual statistics and the month! It was in today's Tribune again, and I know it will be in the paper in April as well. They've probably slotted it in already. Really, it's not even news anymore. But despite all that, people are still making money in real estate. Today's Tribune also features an article about a house in Malibu that's renting for $150,000 a month. That's right, RENTING. The rental market does seem to be doing really well now. More and more people are renting, and more and more people are buying rental property. Can't sell those condos anymore? Turn them into apartments!