Does ‘buyer beware’ apply to illegal sewer line installation?

Q : Two months after I bought a house, I discovered that the seller had run an illegal sewer line into a neighbor’s property in order to make it appear as if the house had a sewer-line connection. There are no permits on file for it and he didn’t disclose it in the sale. Moreover, the seller didn’t have an easement to cross through a neighboring property to run the sewer line into that other property.

Does “caveat emptor” apply? There wasn’t any way for me to detect that sewer line during the inspection. — Denise K. A : What a mess. Certainly, caveat emptor, or “let the buyer beware,” applies here, because it’s far easier to remedy a problem like this before a deal is closed than after.

But the seller’s lack of disclosure was obviously intentional and he appears to be civilly liable to you and criminally liable for theft of services.

You’ve got some calls to make. First, you should report this theft to the police, in part so that any potential responsibility for this illegal hookup will be taken off of you and, in part, so you can begin to build a civil case that disclosure fraud has occurred. Without sewer service

Who knows what other services this guy was stealing from neighbors? You also should call the city to report the issue since this involves stolen city services and a lost sewer tax. One of the two entities will inform the affected neighbors.

And yes, all of this will leave you without sewer service. Sadly, you will be stuck paying the $2,000 to $7,000, including the plumber hookup fee, to legally connect to a city sewer line. You may be able to eventually recover some or all of this in a civil action.

Contact the seller’s real estate agency and report this deception and the suspected theft/trespass. You can introduce the possibility that the listing agent knew about this condition — if you have reason to believe that is valid.

Then pull together all contracts, closing papers and disclosures, and consult with a highly rated local real estate attorney.

Disclosure fraud can be costly to litigate (and duplicitous sellers know this), but a good attorney can at least

tell you where you stand and if it is worth it to sue.

It seems you have strong grounds to move forward. But at what cost? Report hookup to authorities

And don’t forget to contact your homeowners insurance company to see what it might offer in the way of coverage or advice. If you purchased a home warranty, you can check to see if it includes major plumbing issues, though this is a bit of a long shot since the claim may be denied because of the illegal hookup.

What will happen to the seller on the criminal level, assuming he can be located, depends on local and state laws. In Florida, for example, this person could face the charge of “trespass and larceny with relation to utility fixtures; theft of utility services,” which includes theft of water and sewer services. But what he did is illegal in all states.

You didn’t mention the use of a buy-side home inspector — and that’s a step you shouldn’t skip — although even an inspector may not have detected this illegal rerouting. Standard inspections usually don’t include sewer lines, but they do include inspections of septic systems.

I’m sorry to say there’s no heartening win-win scenario to offer in your case. Q : My father bought a house many years ago that is fully paid off. He now wants to gift it to me. What are some of the tax consequences and other considerations we should think about? — Nancy R. A : First of all, gifting a home may be problematic for your dad if he needs Medicaid coverage in the near future. That’s because Medicaid has a five-year “look-back” period to determine if applicants have transferred off any major assets to become eligible.

A penalty in the form of a multiple-month delay in coverage could be assessed against him.

If we assume the average monthly cost of nursing home care in your state is $6,000, then Dad would have to wait years for Medicaid to kick in.

For example, if he transferred a $240,000 house to you on May 1, 2017, and unexpectedly needed to move to a nursing home on May 1, 2018 and spent down his remaining assets to become Medicaid-eligible on May 1, 2019, that’s when the penalty would begin.

It’s duration in this case would be 40 months ($240,000/$6,000 = 40), meaning he wouldn’t become eligible for coverage for three years and four months. You will definitely need to talk with a qualified estate or elder law attorney or financial planner if you think he may need Medicaid at some point.

If not, gifting a home makes more sense, assuming he hasn’t already given away millions. While a person giving away property valued at more than $14,000 in a given year must file a gift tax form, that gift will only be taxed if it causes him to exceed or further exceed his lifetime federal individual estate and gift-tax exemption limit of $5.49 million (up from $5.45 million last year).

So unless your dad is relatively wealthy and has gifted enough in his life to exceed that threshold, he won’t incur a gift tax by giving you the house.

But you should also know that if you were to sell the place quickly after receiving it as a gift, you would face a hefty capital gains tax. That’s because when a home is given away, its original cost to the giver — its “tax basis” — becomes the recipient’s tax basis unless that recipient lives in it for at least two years before selling.

In other words, if your dad bought the house for $140,000, and you turned around and sold it off posthaste for $240,000, you’d owe capital gains taxes on that $100,000 profit, if you sold before those two years expired.

In another tax-saving scenario, your dad could sell the house to you for market value at a low down payment and hold the note himself, possibly with an arrangement to forgive the balance of the note if he dies before you pay it off. Avoid being targeted by the IRS Then, there are a couple ways your dad could give you the house and still live there without feeling the wrath of the IRS, assuming you are inclined to live together.

One is with a qualified personal residence trust, or QPRT, which would allow Dad to move the residence out of his taxable estate without vacating it.

An IRS formula would then put a value on his right to live in the house with the balance considered a gift, subject to that $5.49 million federal gift tax exemption limit.

The other way is if he was to sell you the home for fair market value but pay market-level rent afterward to remain there.

As for simply inheriting the property when he dies, the home’s tax basis would then get “stepped up” to market value, which would eliminate capital gains taxes on any appreciation on it after he bought it.