There’s Debt, and Then There’s Gambling Debt

Q: My father recently died and left about $25,000 in credit card debts. Most of the debts were run up at automated cash machines in Las Vegas where my father did a lot of gambling. My mother never used the cards, although her name is on them and my father had her co-sign the applications for them. Is she liable for his debts? Can the banks touch the $25,000 life insurance policy that was paid out on my dad in order to get their credit card debts repaid? --W.L.S.

A: Our experts recommend that you see an attorney as quickly as possible to resolve these issues, preferably one specializing in creditors’ rights litigation. You may be surprised at what you will learn, and the legal fees may be money well spent.

The banks will certainly try to persuade your mother that she is liable for her husband’s debts under the community property laws of California. And they will attempt to collect on those debts from your mother’s assets, including any life insurance benefits she may receive from your father’s insurance policy.

However, your mother may want to fight the banks’ efforts on the grounds that these credit card debts are essentially gambling debts, since the automated teller machines your father used to incur the debts were located in or near casinos. Traditionally, gambling debts have not been enforceable in any state except Nevada and New Jersey.

A ruling similar to this was handed down last year by a Massachusetts appeals court in a case entitled Connecticut National Bank of Hartford vs. Kommit. The ruling held that the bank could not collect $8,000 in credit card debts because the money was used for gambling in Atlantic City, where the money was advanced through automated teller machines.

Gambling debts are not enforceable in both Massachusetts, where the defendant lives, and Connecticut, where the bank is based. However, the bank is expected to appeal the decision.

Obviously your mother is going to need the help of an attorney to mount a defense like that in the above case. But it may well be worth it to pursue this line of reasoning.

Partners and House--It Gets Complicated

Q: A partner and I own a house worth about $185,000 that we purchased for $155,000. If we sell the house now and dissolve the partnership, will I have to repurchase another house within 24 months for at least $92,500, or half the $185,000 sales price? Can this replacement house be purchased in a country other than the United States? --R.P.

A: The section of the Internal Revenue Code permitting homeowners to defer taxes on their real estate gains if they buy another home of equal of greater value within 24 months may not apply in your case. Why not? Because the law permits taxpayers to roll over their residential real estate gains to a replacement house only if the homes involved are the taxpayer’s primary residences.

If the home is a piece of investment property, you could engage in what is called a Starker or 1031 exchange, a tax law provision that essentially allows taxpayers to defer paying taxes on their real estate gains if they purchase another, similar piece of investment property with their gains within about a year of the initial sale. But even this law would not apply if you and your partner go your separate ways, since it requires that the same real estate owners transfer their gains together in the replacement property. However, if your partner is also your roommate and the house involved is your primary residence, then you would have no trouble qualifying for a residential gains rollover. And, yes, you may purchase a replacement residence outside the United States within the required 24-month period and still qualify for the tax deferral on your gains.

On the Trail of the $125,000 Exemption

Q: My ex-wife and I co-own a house in which she still resides. I live elsewhere. We are both over age 55. If we were to sell the house, would we each be entitled to claim the $125,000 exemption on the profits we realize from the sale, or would we be required to share a single exemption? --T.R.

A: Taxpayers often forget that there are three requirements they must meet to take advantage of the $125,000 exemption. Being age 55 is only one of those requirements. The house being sold must also be the taxpayer’s primary residence and he or she must have lived there for three of the last five years.

The question is, do you meet all three of these requirements? There is little question that you have satisfied the first two. But have you lived in the house for three of the last five years? If you are only recently divorced, the answer may, indeed, be yes. And you would be wise to begin trying to sell the house now while you still meet the eligibility criteria.

If you can meet the requirement, both you and your ex-wife would be entitled to a $125,000 exemption, since you are no longer married. However, if you have not lived in the house for three of the last five years, then your ex-wife alone would meet the necessary requirements and only she would be entitled to a $125,000 deduction when the house is sold. However, if you now own a house and later sell it, you would be entitled to your own $125,000 exemption. The only exception to the rules you might face would occur in the event you remarry and your new wife had already used a $125,000 one-time exemption. You would not be entitled to invoke your exemption because your new wife had already used one--even though it was before you married her.