Inman

Don’t throw out HUD-1 forms

DEAR BENNY: I saw your column that appeared recently in our local paper. One writer asked you what papers he needed to keep on a house he has owned since 1988, including a couple of refinances. That made me wonder what papers I need to keep on houses my wife and I have bought and sold and no longer own. We purchased our first house in 1999 and sold it in 2002. We purchased our second home in 2002 and sold it in 2007.

We also owned a rental home that we sold in 2007. What, if any, paperwork should we still keep? For example, do we need to keep the deeds or the title insurance policies? –Steve

DEAR STEVE: As we move closer to a paperless society, it’s hard to imagine that documents generated back in 1999 still have to be kept.

But, unfortunately, as the saying goes, "better safe than sorry."

Deeds and mortgages (also called deeds of trust) that have been paid off — and recorded among the land records in the state or county where your house is located — can be tossed out. Most jurisdictions now have all of these documents available online, so there is no need to hang on to them.

But you must make sure that those old mortgages, which you know you paid off, have in fact been released on the same land records where the original mortgage was also recorded.

How do you do this? If you have a document entitled "release" or "certificate of satisfaction" that shows a recording number on its face, you don’t have to keep those documents.

But if you don’t have such a release document, then you may want to ask a title attorney or title company (called escrow companies out West) to do a quick title search to make sure that all paid-off mortgages have, in fact, been released and recorded.

You bought your first house in 1999, so you can toss all documents relating to that house. I would, however, keep the settlement statements (called HUD-1) for both the purchase as well as the sale of the house.

If, however, you bought and sold houses before 1997, you absolutely must keep all HUD-1 forms. Why? Prior to May 1997, the law allowed you to "roll over" your profit into the new house.

For example, let’s say in 1990 you bought a house for $100,000, and sold it in 1995 for $150,000. But in that same year, you bought a new house for $200,000. For this discussion, I am ignoring any improvements you may have made, although any such improvements will increase your tax basis.

You made a profit of $50,000. But since you purchased a new house within two years from the time you sold your other house, you could "roll over" the profits. What this meant is that although you paid $200,000 for the new house, your tax basis was only $150,000 (i.e., $200,000 minus $50,000).

Let’s say that today you sell that house for $650,000 and are married and file a joint tax return. Under the new law (that took effect in 1997) you can exclude up to $500,000 of profit. (If you are single or do not file a joint return, you can exclude up to $250,000 of profit. The "rollover" no longer exists.)

In our example, the basis of your house (ignoring improvements) is $150,000. You sold it for $650,000, thereby making $500,000 of gain. You can exclude all of that gain and pay no tax when the property is sold.

But let’s say you sell it for $700,000. You think that since you paid $200,000 for it, your profit was $500,000, which you can exclude.

Wrong! Because you took advantage of the old (now repealed) rollover, your tax basis is only $150,000. Gain is calculated on the difference between the tax basis of the house and the sales price.

Thus, you really need to keep all of the HUD-1 forms. Obviously, to reduce your gain, any improvements that you have made over the years — with proof of the costs of those improvements — will assist you should the Internal Revenue Service ever decide to audit you.

Talk to your specific tax advisers on your situation.

DEAR BENNY: In applying for a homestead exemption for my disabled wife, I was informed that she was not eligible for the exemption because she was not shown on the warranty deed or title policy when it was issued several years ago. As the loan was in my name only, she does not appear as having an ownership interest on any legal documents. Is it possible to have her added in a "joint tenancy" with a new warranty deed? Would this be permitted by the mortgage holder?

We did not realize at the time of closing that I was to be listed as the sole owner. The real estate tax bill, however, comes every year under both of our names. –John

DEAR JOHN: You have every right to add your wife to the title of your house. Back in the 1980s, Congress enacted legislation prohibiting lenders from asserting the "due on sale" clause that exists in most mortgages (deeds of trust). One of the exceptions involves a "transfer where the spouse or children of the borrower become an owner of the property."

The "due on sale" clause was created by lenders who did not want homeowners who had a favorable, low interest rate to sell their property and allow the buyer to assume (i.e., take over) the existing low-interest-rate mortgage.

So, the law specifically prohibits a lender from asserting the due-on-sale clause where a spouse conveys his/her title to the other spouse, or, as in your case, adds the spouse to the title. You are free to add your wife to the title.

DEAR BENNY: I live in a condo and am writing you about an issue with our appointed board of our homeowners association. How do I find an attorney that has a great record in amending bylaws and helping a community understand what needs to be changed in our documents? –Sheila

DEAR SHEILA: Before I answer your question, I have to renew one of my favorite pet peeves. Please understand that I am not picking on you, as many people make this mistake.

There is a difference between a condominium and a homeowners association. You live in a condo, and thus should not use the words "homeowners association."

To answer your question: There is an organization known as the Community Association Institute (CAI), located in Virginia and online at www.caionline.org. I suggest you contact them, since they may know of some attorneys who can assist you. There are a number of local CAI chapters throughout the United States, and there may be one near you.

DEAR READERS: In a recent column, I addressed the question of what a homeowner in a community association should do if she is disturbed by barking dogs. I suggested first talking to the dog owner to explain your concerns. If that did not work, I suggested asking the board of directors to assist in curtailing the noise. And if that did not work, I wrote: "I believe you have only three alternatives: (1) file a lawsuit against those owners claiming they are creating a private nuisance; (2) put up with the noise; or (3) move out of the community."

I received a large number of e-mails on this topic. Here are some of the comments from my readers:

I welcome all comments from readers, both positive and negative.