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INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 1

PART ONE: INDIVIDUAL TAX PLANNING . . . . . . . . . . . . . . . . . . . . . . . . 5

1. Tax Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2. Investment in a Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

3. Real Property Rental . . . . . .. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

4. Collecting Debts in Small Claims Court . . . . . . . . . . . . . . . . . . .. . . . . . . . . 105

PART TWO: INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 128

5. Limited Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130

6. Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150

7. Bonds and Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . 163

8. Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

9. Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

10. Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .200

11. Money Market Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

12. Real Estate Investment Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .232

PART THREE: DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

13. Living with Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

14. Filing Chapter 7 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .299

PART ONE: INDIVIDUALS ENGAGED IN BUSINESS ........................................ 1

1. Partnerships .............................................................................................................2

2. Doing Business as a Corporation ............................................................................35

3. Limited Liability Companies ....................................................................................62

4. North American Free Trade Agreement ..................................................................86

5. Guarding Against Employment Problems ...............................................................104

PART TWO: AFTER RETIREMENT ......................................................................132

6. Social Security ......................................................................................................133

7. Supplemental Security Income ...............................................................................170

8. Disability Benefits ..................................................................................................189

9. Medicare ...............................................................................................................211

10. Nursing Home Care .............................................................................................235

PART THREE: ESTATE PLANNING ......................................................................246

11. Revocable Trusts ................................................................................................. 250

12. Probate ................................................................................................................270

13. Joint Tenancies and Gifts .......................................................................................305

14 Durable Powers of Attorney ...................................................................................318

INDEX ...................................................................................................................... 358

Earning money is one thing; keeping it is quite another. Some 15 years ago, a Democrat Congressman stated on the floor of the House of Representatives that all money belonged to the government and the people could only keep the amount the government said they could. That actually is correct since the government can take all money by simply taxing it. The Congressman received polite applause from his fellow congressmen. Unfortunately that belief seems to pervade Washington and most state capitols.

We, Americans must work over half the year to pay all of our federal, state and local taxes, and that still isn't enough to pay the government bills. The federal deficit is still increasing; so are most state deficits. In 1993 the California deficit increased by $1 billion per month. What is frustrating is that the government simply raises taxes. It could cut government spending simply by implementing the same financial practices used by businesses. Farmers harvest crops; politicians harvest taxpayers. Most people do not believe that we get full value for our tax dollar, whether it be for the $1,000 toilet seat used in the military or the $250,000 grant to determine why rats get drunk when they drink alcohol.

Most Americans believe they can handle their money and spur the economy better than the government. If a reader of this book does not share this philosophy, this book is not for them. Through this book we are trying to help people make more money and keep it legally. If a person does not care about making and keeping money, there is nothing to be gained from reading this book.

Besides the government taxing our assets, we also have to contend with all of the vagaries of the financial world: inflation, a poor economy, job loss, retirement, disabilities and nursing care. These are the normal concerns of life. They should be recognized, and there should be a plan developed for facing and dealing with them. To do so requires money, usually a lot of it. Such money is not obtained by paying it in taxes nor is it amassed by putting it in a jar and burying it in the ground.

As a lowly citizen and even a lowlier taxpayer, there are only a few things that we can do legally to fend against government seizure of our money and to help it grow.

This book is designed for the average middle class person. Rich people have their own advisors. There are no advanced financial planning techniques in this book designed to be used by wealthy individuals only. On the opposite end of the spectrum extremely poor people have no estate to manage. Only the social security and debt chapters of this book will be of use to them. The average person however with family income of $100,000 or less per year and assets of less than $600,000 will find the information in this book practical, informative, instructive and easy to use.

A true financial planning book deals not only with life but death as well. Government taxes a person both in life and death. As Napoleon's sister said on her death bed, "Nothing is forever except death and taxes." Unless a person plans for the disposition of his estate after death, an expensive probate is required and unnecessary estate taxes have to be paid. All of which will come out of the estate, reducing the amount the heirs will receive. In other words, part of a decedent's estate will go to the government rather than loved ones. This result is avoided with good estate planning, which should be part of every person's total financial plan. Consequently, there are two companion estate planning volumes to complete the package started by Financial Planning Volumes I & II.

Since financial independence is the goal of everyone, a good financial plan helps to guide the growth of a person's money. This book discusses the major types of investment that are available to the average person. This book does not talk about every type of investment, but it does speak on those available to a person with a small to medium amount of disposable income.

This book deals with the possibility of facing bad times. Discussions on social security, supplemental security income, disability, Medicare, nursing homes and even debt are discussed in detail. These are all possibilities that face everyone. No matter how wealthy or in good health a person is now, things can change quickly. Money can be lost or stolen, and good health can disappear in a wink of an eye. The practical person is aware of those possibilities. He builds a plan to shield against those possibilities by incorporating potential government benefits into a financial plan.

This is a practical book. It could be expanded into an entire treatise with every chapter becoming a book in itself, but that is not necessary. The basic information is distilled to the point that the average person can read any chapter and find the basic information needed to make an informed decision. These are recommendations concerning common tactics and investment strategies that should be employed by the average middle class person as part of his investment plan.

We live in a great country with a great deal of opportunity. No one ever takes advantage of every opportunity that is presented to them. What is important is that a person take advantage of enough opportunities so as to be protected from adversity in the future.

Part One of this book addresses those areas that are most often considered by an individual in creating and implementing a financial plan. Fundamental tax law is presented at the very beginning of this book to create a basic understanding on which to build.

Part One covers the following areas of financial planning which affect most persons with assets in some fashion:

1. Tax Planning.

2. Investment in a Home.

3. Real Property Rental.

4. Collecting Debts in Small Claims Court.

The purpose of financial planning is to keep as much money and assets from the government as possible. Once the government gets its hands on a person's property, it's gone. This is not hyperbole. It's an absolute fact.

A person should not rely on social security to provide for support in old age. The social security system is tottering on insolvency. It is estimated that in 2010 a person retiring will only receive eighty one cents ($.81) for every dollar contributed. The reason for this is that the number of people receiving benefits will dramatically increase while the number paying into the system drops.

In 1945 it was estimated that 16 people paid into the system for every person receiving benefits. In 2010, it is estimated that 1.6 persons will be paying for every person receiving benefits.

The reason behind this increase in people receiving benefits is that the life span for people has increased. In 1940 life expectancy was 65 years of age. When social security was created it was believed that people would die within a year or so after they started receiving benefits. The plan was designed around that assumption.

Modern medicine and a change in life style have changed that scenario significantly. As a result, people who have not planned for their retirement may find themselves destitute in their golden years even though they are receiving social security.

This book is written for people attempting to create an estate. In the movie The Barefoot Countessa, a wealthy man tells Humphrey Bogart, "Taking one hundred thousand dollars and raising it to a million dollars is work. Taking a hundred million dollars and raising it to one hundred and ten million dollars is inevitable." It is hard to get started, but once a person is successful, it gets increasingly easier to make and keep money. It is toward that goal of helping people become successful and secure that this book is directed.

Tax planning is the process of reviewing tax alternatives available to determine how to reduce the obligation to pay taxes. Tax planning requires that the person know the tax code and be familiar with his tax situation. The best tax planning takes advantages of the tax breaks and opportunities authorized by the Internal Revenue Code to reduce taxes legally.

Tax planning is totally legal and the right of every American. Justice Learned Hand of the United States Supreme Court once ruled,

Income taxes are an important consideration in the financial lives of most people. They usually play the determinative role in financial planning. With taxes constantly increasing as a result of the government's attempt to raise revenue, every financial decision must be reviewed to ascertain its tax consequences. It is the effect of income taxes on a person's paycheck that determines the take-home pay and the amount of disposable income the individual has to spend. Income taxes directly affect the quality of life of every taxpayer. Businesses live or die by their ability to master the tax code. The welfare of all employees are affected by the obscure provisions of the Internal Revenue Code.

The IRS provides free tax information and services. IRS publication 910, Guide to Free Tax Services, describes the publications and services available to taxpayers. There are over 100 publications by the IRS containing tax information. Videotaped instructions for completing tax returns have been prepared by the IRS in both Spanish and English. They are available in some public libraries. Braille materials are also available at regional libraries in conjunction with the Library of Congress. The IRS offers the TELE-TAX service which is a telephone service that provides recorded tax information on over 140 subjects. The TELE-TAX service will also tell a taxpayer the status of a refund.

In addition, the IRS also operates a telephone service for hearing impaired persons who have access to TDD equipment. Call 1-800-829-4059.

The IRS provides toll-free numbers in every state for taxpayers to call regarding tax questions.

Congress mandated that the IRS create a Problem Resolution Program for taxpayers that are unable to resolve their problems with the IRS. A taxpayer may write to the local IRS District Director or call the local IRS office and ask for Problem Resolution Assistance. The problem resolution officer will advise the taxpayer of the Taxpayer's Bill of Rights and help solve problems. While the problems resolution officer cannot change tax law or technical decisions, but he can, nonetheless, assist in other ways.

Every person, business or entity that earns money must pay taxes. The amount is an increasing scale based on the amount of earnings. An individual taxpayer's tax rate, filing requirements and standard deduction are determined by his filing status. The five filing statuses are:

1. Single. Unmarried or legally separated on the last day of the tax year. State law determines if a person if married or legally separated.

2. Married filing jointly.

3. Married filing separately.

4. Head of Household. A qualifying widow or widower with a dependent child.

5. Qualifying widow or widower.

Congress has provided tax exemptions. These are set amounts that taxpayers deduct from their income before calculating taxes. Tax exemptions reduce a taxpayer's income before tax is computed. There are two types of tax exemptions which are personal exemptions and dependency exemptions. A taxpayer is entitled to one exemption for himself and, one for his spouse. These are the personal exemptions. An exemption for a spouse with individual income can only be taken if a joint return is filed. In 1990 each exemption was worth $2,050. For example, a married couple with $35,000 income will pay taxes on $30,900 after the personal exemptions are taken: $35,000 - (2) 2,050 = $30,900.

The dependency exemption of $2,050 is permitted for each dependent of a taxpayer. As with a personal exemption, each dependency exemption reduces the taxpayer's gross income before tax calculation. There are five tests for dependency that must be met before an exemption is allowed.

1. Member of Household or Relationship Test. The dependent lives with the taxpayer or is a relative.

2. Citizenship Test. The dependent is a U.S. citizen or resident, or a resident of Canada or Mexico.

3. Joint Return Test. The dependent has not filed a joint return with his spouse.

4. Gross Income Test. Generally, a dependency exemption is unavailable if the person sought to be claimed has earned more than $2,050 for the year. This does not apply to the earnings of a child or a student under 24 years of age.

5. Support Test. More than half of the support of the person must be provided by the taxpayer during the year.

A situation may exist where several persons contribute at least ten percent (10%) to the support of a person, such as children supporting an elderly parent. In such a case, no one individual can meet the support test. When this happens, each person providing more than ten percent (10%) of the support may agree to let one claim the exemption. Each person agreeing not to claim the exemption must sign a written statement to that effect. Form 2120 is used for that purpose. It must be filed with the tax return of the person claiming the exemption.

Not everyone is allowed an exemption. The amount that a taxpayer may claim as a deduction is gradually reduced once his taxable income exceeds the level for his filing status.

Taxable Income Subject

If the taxable amount is less than the amount shown in the above table, the taxpayer continues to deduct the exemptions on the Form 1040 as usual. The amount of the exemption phaseout is computed using the tax rate schedules.

The Internal Revenue Code requires all persons in business to elect one of two forms of accounting methods. The two methods of accounting are the cash method and the accrual method. The requirement for an individual to deduct business expenses as they are paid or to deduct them as they occur (maybe before they are paid) depends on the accounting method employed. Once elected, a taxpayer cannot change accounting methods without the consent of the IRS.

Under the cash method of accounting, the taxpayer reports all items of income in the year that they are actually or constructively received. The taxpayer will only deduct those expenses actually paid. This is the tax method that most individuals utilize.

Under the accrual method of reporting, a taxpayer reports income when earned; not when received. Likewise, expenses are deducted when incurred; not when paid.

Income is considered constructively received by a taxpayer when it is credited to a taxpayer's account or is set apart in any way that makes it available to the taxpayer. Actual possession of the income is not necessary. If a person cancels a debt that is owed him by a taxpayer, the amount of the canceled debt is income to the taxpayer and must be reported. Income received by an agent of a taxpayer is constructively received by the taxpayer and must be reported.

Regardless of the method used, prepaid income is generally reported when received if the funds are available to the taxpayer.

If the taxpayer is on the accrual method of reporting, advance payments for services to be performed by the end of the tax year can be deferred from income until the taxpayer actually earns them by performing the services, Publication 538, Accounting Periods and Methods, covers in detail the advantages and detriments of both methods.

Once an accounting method is chosen it cannot be changed without IRS approval. A taxpayer, however, can use a different method for each business the taxpayer may have. If the taxpayer wishes to change his accounting method, Form 3115, Application For Change of Accounting Method, is used.

The Earned Income Tax Credit is a refundable tax credit available for a low-income worker who maintains a household in the U.S. that is the principal residence of the worker plus a child or children for over one-half of a tax year. The taxpayer must also meet the following requirements:

1. Be married and filing a joint return and entitled to a dependency exemption for the child or children, or

2. Be a surviving spouse, or

3. Be a person qualifying as a head of household whose unmarried child or children are part of the household.

The earned income credit is refundable to the extent that it reduces the tax below zero. An eligible taxpayer may elect to receive an advance payment of the credit through the taxpayer's paychecks. Form W-5 can be used by a taxpayer to notify his employer that he chooses to receive the advance payments rather than wait for a tax refund after the return is filed.

A credit for federal excise taxes on gasoline and special fuels exists for fuel used for the following:

1. Farming purposes.

2. Non-highway purposes of a trade or business.

3. Operation of an intercity, local, or school bus.

A one-time credit or refund is allowed to the purchaser of a qualified four-wheeled diesel-powered vehicle, one with a gross weight of less than 10,000 pounds that is registered for highway use.

The credit is one hundred ninety-two dollars ($192) for a truck or van and one hundred two dollars ($102) for other vehicles. The credit reduces the basis of the vehicle and is computed on Form 4136 and attached to the taxpayer's Form 1040.

The alternative minimum tax was designed to assure that wealthy corporations and high-income individuals do not avoid taxation altogether through legitimate investments and tax planning. The calculation of the alternative minimum tax is figured on Form 6251. If the minimum tax is greater than the taxpayer's regular tax, he must pay the alternative minimum tax amount.

*** END OF SAMPLE VIEW OF SECTION ***

One of the best ways of avoiding or reducing taxes in a family is to split the income among the family members. Income splitting is beneficial: graduations in individual income tax rates reduce total income tax liability for the family when income is shifted to family members in a lower tax bracket. Two family members paying taxes on $25,000 each is cheaper than one paying taxes on $50,000.

A transfer to a child younger than 14 years of age might not result in a tax saving because the "kiddie tax" generally will require the income to be taxed at the parents' rate.

For parents owning a business substantial tax savings usually will result if a taxpayer is able to employ his children in the business. Hiring a child always results in income being shifted from the parent to the child.

The child's wages are deductible as a legitimate business expense by the parent. To be deductible, the services must actually be rendered by the child. In addition, the child's wages must be reasonable for the services rendered. Accurate record keeping is needed to document that the payments to a child are for work actually done and not gifts.

The title guaranty program is relatively new but offers significant benefits to parents seeking to provide for their children's future college education. Under this program a parent pays a lump sum to the trust established by the state's tuition program and identifies the child as the beneficiary. Under the terms of the trust the child will be entitled to four years of college services at no additional cost to the parent. The trust may also provide cash refunds in the event the child does not attend the college.

This program provides a way for parents to prepay a child's college education at a lower tax rate. The payment is viewed as a gift by the parent and applied to the $600,000 unified credit of the parent: the $10,000 annual gift exclusion is not available for the parent because the student is not immediately attending the college.

The increased value of the education over the amount the parent had paid is income to the child, once the child starts attending a college under this program. The increased value must be reported as income by the child. Still, there will probably be no taxes since the child will be in a low tax bracket.

For example, assume that a parent pays $15,000. Ten years later when the child attends college a four-year education costs $31,000. The income to the child will be $16,000 spread over the four college years. The child will report $4,000 per year income: the increased value of the education.

An investment tax credit is a special credit in the tax code for investment in a trade or business involving any of the following:

1. Qualified rehabilitation of an older building,

2. Investment in solar or geothermal energy equipment, or

3. Investment in qualified timber property.

The investment tax credit is combined with the targeted jobs tax credit, the alcohol fuels credit, the research credit and the low-income housing credit to make up the general business credit. Each of the credits is calculated separately and then totaled for the general business credit. The general business credit is used to apply credit limitation and carryback and carryforward rules.

The investment tax credit for rehabilitating old buildings is ten percent (10%) of the expenditures. The requirements for the tax credit are:

1. The credit is only available for non-residential buildings, and

2. The building must have been placed in service prior to 1936.

In addition, a twenty percent (20%) credit is available for certified historic structures listed in the National Register or located in registered historic districts and certified as being historically significant.

The basis of the building is reduced by the amount of the investment tax credit claimed.

The solar and geothermal credit was scheduled to expire at the end of 1991. Instead, its name was changed to "energy investment credit." Now there is a ten percent (10%) energy investment credit for solar or geothermal energy equipment placed in service during the year. The credit is limited to such depreciable property that is constructed, reconstructed, erected, or newly acquired that meets certain required performance and quality standards.

A ten percent (10%) reforestation credit on an amortizable basis is allowed on any qualified timber property that a taxpayer acquires during the year. This basis may not exceed $10,000 ($5,000 if married filing separately). A qualified timber property is any woodlot or other site in the United States that contains trees in significant commercial quantities and that is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products.

*** END OF SAMPLE VIEW OF SECTION ***

A sole proprietorship is a business that is totally owned and operated by just one person or a husband and wife and is not incorporated. The owner is taxed directly on all income from the business. The sole proprietor reports the business income and expenses on Schedule C of his Form 1040.

The sole proprietor must pay estimated tax and self-employment tax on business net income. A sole proprietor may take deductions for business expenses that are reasonable and ordinary. In addition, a sole proprietor may take a deduction of twenty-five percent (25%) of the health insurance premium for himself, a spouse and dependents.

A partnership is a legal entity composed on two or more individuals or companies to conduct a business, usually for profit. A partnership does not pay any taxes. The partnership merely reports all of its income and expenses by filing a tax return. Under the Internal Revenue Code, all of the income and expenses of a partnership is attributed to the partners according to their ownership interest in the partnership. The partners are required to include their share of the partnership income and expenses on their personal tax returns.

A regular corporation is referred to in the tax code as a C corporation because that is the chapter of the tax code which deals with it. A C corporation is subject to a different taxing structure than an S corporation, partnership, or sole proprietorship.

The income of a C corporation is subject to double taxation. The corporate income is taxed first when the corporation files its corporate tax return for the net earnings of the corporation. The C corporation income is taxed again when the corporation pays dividends to its shareholders. The dividends that a shareholder of a C corporation receives are includible in the income of the shareholder on his Form 1040 Schedule B.

For example, assume that a C corporation has $1,000,000 in net profit, it pays approximately $340,000 in taxes. After it distributes the remaining $640,000 in dividends to the shareholders, they pay taxes on the amount they receive. Assuming that all shareholders' tax rates are twenty-eight percent (28%), they will pay an additional $179,200 in taxes. The total tax on the corporate income of $1,000,000 is $519,200. In other words, the joint tax on corporate income exceeds fifty-one percent (51%).

Tax shelters are investments that offer the possibility of reducing the investor's current income taxes through legal methods. There are many different types of tax shelters such as:

*** END OF SAMPLE VIEW OF SECTION ***


D. SIMPLIFIED EMPLOYEE PENSION (SEP)

A simplified employee pension (SEP) is a simple written plan that allows an employer to make tax deductible contributions towards the employer's and the employees' retirement. The SEP program allows the employer to make contributions to the Individual Retirement Accounts (IRAs) of each participating employee. A SEP may be established by an unincorporated employer thereby making the contribution to a self-employed participant "earned income."

The annual SEP contribution of an employer excluded from the participant's gross income is the lesser of fifteen percent (15%) of the participant's compensation or $30,000. If the employer exceeds this amount, the participant will be subject to a six percent (6%) excise tax on the excess contribution. A SEP requires the following:

1. That the employer contribute to each employee who has reached the age of 21 years,

2. That each employee has worked for the employer three of the last five years, and

3. That each employee received at least the indexed dollar

amount of compensation for the year (in 1990, it was $342).

Any plan that discriminates by excluding otherwise eligible employees will not qualify for tax exemption. An employee can also contribute to the SEP-IRA subject to the normal IRA contributions limits.

The most common tax shelter involves rental real estate. In the past few years, however, rental real estate as an investment has lost much of its tax saving potential. Passive activity tax laws no longer permit tax losses generated by passive real estate investments to be offset against the investor's active income (his wages or stock dividends or bond interest).

In the face of these tax restrictions, investment in rental real estate should only be undertaken if the property can pay for itself. Relying on expected appreciation as a justification for purchase of a property may no longer be wise since passive losses from the property are not deductible against active income.

Anyone intending to invest in rental real property should be aware of the following tax characteristics affecting such property:

1. Passive Activity Rules. Unless an investor owns more than ten percent of the property or investment, the investment will be considered passive in nature. A limited partnership investment is considered passive regardless of how much the investor owns. If the investor meets the active participant test, he can deduct up to $25,000 of rental losses from non-passive sources. This $25,000 maximum is reduced for investors with over $100,000 adjusted gross income.

*** END OF SAMPLE VIEW OF SECTION ***

Payments received for an occupational sickness or injury are fully exempt from tax if the payments are made under a workers compensation act or a state statute similar to it. The exemption also applies to payments to a survivor if they would otherwise qualify as workers compensation.

The tax exemption does not apply to retirement benefits received based on age, length of service, or prior contributions to the plan, even though the worker retired because of occupational sickness or injury. Should the worker later return to work and be assigned light duties while still receiving benefits, the benefits received thereafter are taxable. If "workers compensation" reduces social security or railroad retirement benefits the worker is receiving, part of the "worker's compensation" may have to be included income. This issue is addressed in Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits.

Bartering is the trading of property for services or the trading of services for services without the payment of money. Under the Internal Revenue Code bartering is treated the same as the payment of money for the property or services. The persons receiving the bartered property or the services must include, the fair market value of the property or the services received on their tax returns as income. This is the government's attempt to tap the underground economy of an estimated hundred billion dollars per year.

For example, assume that a painter paints a house and the paint job is worth $1,000. At the same time, the owner, a mechanic, does a $1,000 repair job on the painter's truck. Each person has $1,000 income to include on their tax return.

If property or services are exchanged through a bartering club, the club is required to furnish the parties and the IRS a Form 1099B, Statement for Recipients of Proceeds for Exchange Transactions. The club is also required to withhold taxes on the bartering unless the parties furnish their social security numbers on Form W-9.

A special tax method of reporting gain from the sale of property is used when at least two payments are received by the seller over a period longer than a year. Installment sale reporting is not usually available for dealers in the property. Moreover, this installment reporting is not available for reporting losses from the sale. Under this method a percentage of each payment reflects the percentage gain on the sale. Example: A car is sold for $2,000. It had cost the seller $1,000. The profit (gain) is $1,000 which is 50%. Payments are $83.33 per month for two years. Therefore, one half ($41.66 per month) is gain from the sale and must be reported on the seller's tax return.

Under the old law installment sale treatment was limited. The seller had to pay taxes on the full profit of the sale although full payment for the property would not be received till some time in the future. The advantage of current installment sale law is that the seller only has to pay taxes on the profits from the sale as they are received.

The single most important investment that the average person makes is in a home. The American Dream is for a person to own his home. When the United States was first formed only persons of property could vote. Wealth, land and happiness have always been viewed as the same in America. The purchase of a home binds the buyer to the land more than any chain. The purchase of a home commits a person to make payments for as many as 30 years. Most of the liquid assets of a person will be used to make the mortgage payments. A sharp downturn in real estate prices can destroy years of appreciation. This chapter is designed to focus attention on the factors involved in a decision to buy a home. This chapter dwells on the issues of whether to purchase, when to purchase and how to purchase.

Once a purchase is made, the buyer must know the legal duties and responsibilities of a real estate owner. Real property law covers more than just the land itself. It also covers the rights and duties owed by the landowner to neighbors and even to trespassers. In the not-so-dim past an owner could do virtually anything that he wished on or with the property. Today, however, such unbridled control over property is past. Land use is now strictly controlled and regulated by zoning and environmental laws.

The rights and duties of landowners form a rich and diverse body of law. Every state has its own body of real property law, but all share similar views of residential homes and the obligations of homeowners. By knowing what is expected of a homeowner a person can determine if home ownership is in his best interests.

The purchase of a home is a major step in a person's life. It usually involves dealing with lenders, appraisers, brokers and contractors. There will be application fees, loan fees, brokers' fees, taxes, assessments and other obligations. Still, the purchase of a home is probably the wisest course of action. Everything simply hinges on the knowledge, preparation and financial condition of the purchaser.

The answer to whether or not a person should purchase a home requires the answer to several subquestions such as:

1. Does the person have a stable job?

2. What size of house can the person afford?

3. How much of a down payment can be put down?

4. Where would the house be located?

Each of these questions overlaps the others. The questions are intertwined and reach into the very depths of the potential purchaser's financial soul.

The most important question is whether the person has a stable job. No lender will even consider loaning to a person who has no job or whose job is apt to be terminated in the near future. A poignant and true example occurred to a couple who owned a home in Willits, California that was for sale. A buyer came forward, was approved by a lender and contracts were prepared for final signature. The buyer was terminated unexpectedly from his position because of a slump in business. The bank immediately canceled the loan. Had the man been fired a month later, the sale would have been completed. Even though, however, he would have been unable to make

the payments and ultimately would have lost both the property and his twenty percent (20%) down payment.

This true example drives home the fact that a person considering buying a home must have a secure job. Otherwise he takes the risk that loss of job will result in loss of the home and the equity in it. There is a common misconception that lenders are overly willing to help buyers who cannot make their payments. While that may be true in some cases, the truth is that most lenders cannot afford to wait an unlimited time for their money. The reason lenders require a down payment of 20% is to provide a margin of security at a foreclosure sale. They can sell 15% below market value and still receive their money.

The size of the house that the person needs may be different from the cost of the house that can be afforded. A newly married couple might only need a single bedroom home whereas a family of six may need a three bedroom home. Occasionally a buyer will purchase a smaller home than needed with the intention of immediately adding to it. This can be a cost-effective approach: it is usually cheaper to add than to buy with the addition already built. On the other hand there is the time and aggravation of getting building permits and dealing with contractors. A construction loan might be obtained from the same lender who is giving the purchase loan; another lender, however, may offer more favorable rates.

The bigger the home, the more it will cost to buy, the more it will cost to maintain, and the more it will cost in taxes. A person can quickly and accurately determine, in a general fashion, the cost of his needs by looking in the newspaper or at the multiple listings of a real estate agent. Since everyone seeks to sell his home for fair market value or more, these periodicals should contain a reasonable approximation of what a home will cost.

The buyer needs to know the maximum amount of down payment he must raise. Most commercial lenders will require the buyer pay between 15% and 20% of the sale price. There are, however, non-commercial lenders who do not require such high down payments. Moreover, many organizations offer home loans to their members with smaller down payments and lower interest rates than commercial lenders. In particular, qualified people should look to the following agencies:

1. Veterans' loans. The Veterans Administration and most state veterans' groups provide low interest loans with low down payments to veterans.

2. Special state loans. Many states have special loans for first- time homeowners. A real estate broker would be the best source of such information.

*** END OF SAMPLE VIEW OF SECTION ***

Another source of homes is through tax sales and repossessions. These serve as the basis for those get-rich-quick seminars in real estate. A lucky person can find a bargain. In most cases the person will get a little break on price, but that may be offset by the time spent in waiting for the property.

A tax sale is when the local tax agency takes the property and auctions it to the public for back taxes. The property is purchased for just the payment of the back taxes if the buyer is the only bidder. The property doesn't normally get to the tax sale if it is encumbered by a lender's lien: if it is valuable, the lender redeems it far earlier in the proceedings. Usually the property sold at tax sales is undeveloped land that is not developable. Extreme care should be taken at any tax sale. Foreclosure sales by lenders are a good way to acquire property. In most states, upon default on a deed of trust (discussed below) a lender can have the property sold at a public auction. He must first comply with notice provisions or pursuant to a court's mortgage foreclosure judgment. It is possible to purchase this property for the outstanding balance of the loans and the unpaid taxes at such auctions

The lender always bids his outstanding loan. He is not concerned with getting the highest price because everything over what is owed is paid to the debtor. Thus property can be bought for below-market value. If the lender is the highest bidder, the debt owed to the lender is reduced by the amount of the bid, and the lender takes title to the property. Once the lender owns the property, he wants to sell it. Most lenders are not in the business of selling property. They list with real estate brokers just like any other ordinary seller.

There is one difference between institutional sellers and ordinary sellers. The institutional seller tries to clear its books quarterly or at the end of the year. A nonrevenue producing item like a house is bad to have on their books. At these times a private citizen may offer to purchase a listed home directly from the institution at a significant savings. In a real case, a couple bought their home in this manner. The time was in a recent recessionary period and the house had been on the market for over a year. The couple offered the bank a ridiculously low amount. To their surprise, the bank counter-offered with a slight raise, and they eagerly accepted. The bank was grateful to unload a white elephant during a recession.

The best way to get such a bargain is to visit every bank and lending institution directly and speak with the home loan officer. Ask him if any homes have been repossessed. Ask about homes that have not yet been presented to an agent (at least the commission can be saved). If the homes are under the control of an agent, negotiate as for any home, knowing you must pay the commission.

A source of government real estate sales is through the General Services Administration. The GSA often sells excess real property through a sealed bid procedure. A person can obtain information about getting on the GSA list by writing to the U.S. General Services Administration, Federal Property Service, Office of Real Estate Sales, 819 Taylor Street, Fort Worth, TX 76102-6115. Phone number (817) 334-2331.

There are many ways to take title to real property. For most people the way is through a deed that specifies the title is being transferred in fee simple absolute: all rights, title and interest in the property are being conveyed, and no other person or entity owns an interest in the property. A fee simple is the total ownership rights recognized by law. It is capable of full and complete alienability. It passes by inheritance to both lineal and collateral heirs of the owner. A fee simple will last forever if it is a fee simple absolute. If it is a fee simple defeasible, the ownership rights may be altered on the happening of certain conditions.

A fee simple absolute is the most complete and absolute ownership of real property permitted by law. A fee simple absolute is limited only by governmental powers such as zoning and eminent domain. A fee simple absolute lasts forever. It will not terminate in the future based on time or the happening of any event.

At common law a fee simple absolute had to be created expressly: It was necessary to use the language "and his or her heirs" to create a fee simple absolute. Example: The deed had to read "To George and his heirs" in order to create a fee simple absolute. The language "and heirs" did not create an estate in the heirs but was still needed to show that a fee simple absolute had been granted. Today South Carolina is the only state that requires the language "and heirs" be on the deed to prove that a fee simple absolute was granted. All of the other states now, either by law or judicial decision, hold that a fee simple absolute is presumed to have been granted unless a grantor states otherwise on the deed.

A tenancy by the entirety is terminated only by:

1. Divorce, which changes the tenancy into that of tenants in common.

2. Mutual agreement of all the joint tenants.

3. Execution against the property by a joint creditor of both spouses. A creditor cannot execute a judgment on one spouse against property held in tenancy by the entirety.

A tenancy by the entirety can be afforded special protection under the Bankruptcy Code. The Bankruptcy Code exempts a tenancy by the entirety from a debtor's estate if the debtor's spouse has not filed for bankruptcy relief and if the property is exempt under the debtor's state law. This issue is discussed in more detail in Chapter 17. Generally, if a married couple wish to take title with rights of survivorship, they should do so under a tenancy by the entirety if it is available in their state.

An easement is a liberty, privilege, or advantage which one may hold in the lands of another. It is a non-possessory interest. The holder of an easement has the right to use the real property for a certain stated use but does not have a general right to possess or occupy the land. The owner of the servient estate, the land subject to the easement, continues to have the right to full possession and enjoyment of his property subject only to the limitation that he cannot interfere with the special use of the property by the easement holder. There are a variety of easements, each of which have their own rights and term of existence.

*** END OF THE SAMPLE VIEW OF THIS SECTION ***

It rarely happens, but there are legal situations where the person with title as owner does not actually own the property and may not know it. In such an instance, a buyer may be buying property that cannot be sold. This strange result occurs as a result of a legal doctrine called adverse possession. For homes located in cities, the chances of being involved in adverse possession are slight. The chances, however, increase as the property becomes more remote.

Title to real property of another can be acquired by adverse possession if the possession of the land is all of the following:

1. Open and Notorious. The possession is sufficient to put the owner of the real property on notice.

2. Hostile. The possession must be without the owner's consent.

*** END OF SAMPLE VIEW OF SECTION ***

Most states require that all deeds, mortgages, powers of attorney and other instruments relating to the title of real property be recorded. The recordation is done in the recorder's office of the county where the real property is located.

Generally, county recorder offices use two indices to aid in title search of the property: the grantor and grantee indices. Every transaction relating to real estate is listed in a chronological order according to the respective names of the grantor or grantee.

A few states use a tract index which lists all of the transactions involving particular pieces of property. Searches in tract indices are easiest to perform since all of the transactions affecting the title are listed in one document.

The purpose of recordation is to give notice to the world of the buyer's ownership interest in the real property. Recording gives constructive notice to the world of the person's claimed ownership from the date of recordation forward. Recording gives the court a basis to determine the conflicting claims of ownership where there are multiple sales or conveyances of the property.

All states have statutes (called recording acts) to determine the legal ownership of real property when two or more persons claim ownership of the same property. These acts vary from state to state but fall into three separate categories: notice, race and race-notice statutes. The rights of the parties in the real property is determined by who recorded their deed first and whether or not they knew of claims by the other parties.

A state's recording act may still deny title to a purchaser of property. It is important that anyone buying property be aware of state's recording acts and search the title comprehensively to ensure that the seller has valid title to the property.

About half of the states have a pure notice recording act: a good faith purchaser will acquire the property free of all conflicting claims even if he is not the first to record. A good faith purchaser is also called a bona fide purchaser: a purchaser without notice of conflicting claims of others. The important issue under this statute: when did the purchaser acquire notice of the other conflicting claims, not when was the deed recorded. For example assume that A sells a farm to B and later sells it again to C, who had no knowledge of the earlier sale. C gets title to the farm, and B must sue A for his damages.

Two states, North Carolina and Louisiana, have this recording act. Under this act the first purchaser who records wins. Notice of conflicting claims is irrelevant. The purchaser that first records his deed shears all rights in the property of anyone recording later. For example, assume that C knows of the sale to B and still buys and records his deed first. C acquires title to the farm.

Most states have a race-notice recording act: the first good faith purchaser that records will be recognized as the owner of the property. This requires that the purchaser both buy the property without knowledge of the conflicting claims of others and also be the first to record his deed.

A person who acquires his interest in a manner other than a sale, such as a gift, is not a purchaser. Therefore his interest in the property can be terminated by the subsequent recordation of a deed by a good faith purchaser.

Example: A gives the property first to B and then sells it to C and finally to D. D records first followed by B and then C. The property goes to D because he bought and recorded first in good faith without knowledge of the earlier gift to B and earlier sale to C.

The three most common methods of financing the purchase of real property are a mortgage, a deed of trust and an installment sales contract. Of the three methods the deed of trust is the most common way of financing real property.

A mortgage is a security interest in real property given by the owner to guarantee payment of a loan. The borrower is called the mortgagor and the lender is the mortgagee. Should the mortgagor default on the mortgage, the mortgagee can seek a judicial foreclosure on the property. If the court finds the mortgagor in default, it will order the property sold in a judicial sale. Most states allow the mortgagor to redeem the property within a year by paying the buyer the amount he paid at the judicial sale, not the amount originally owed.

If the sale proceeds do not satisfy the amount owed, a deficiency judgment for the balance may be obtained against the debtor if permitted under state law.

A deed of trust is a security interest in real property to secure payment of a loan or some other obligation. The borrower is called the trustor and the lender is the beneficiary. The trustor executes a promissory note for the amount of the loan. The payment of the loan is secured by a trust deed on the property for the benefit of the lender as the beneficiary. A trustee is appointed and is responsible for the fulfillment of the terms of the trust deed.

If the trustor defaults on payments on the promissory note, the beneficiary notifies the trustee of the breach. The trustee then gives the trustor (the borrower) notice that the property will be sold unless the default is cured within a statutorily mandated period of time. If the default is not cured (back payments made), the property will be sold at a public auction. The advantages of a deed of trust are twofold:

1. There is no power of redemption after the property is sold.

2. The lender does not have to go through the expense and delay of a judicial foreclosure.

A trustee usually has the option of selling the property at a private sale under the terms of the deed of trust or filing a lawsuit for judicial foreclosure. The only real advantage of filing a judicial foreclosure action (to sue in court) is that a deficiency judgment might be obtainable. Many states, however, have enacted anti-deficiency legislation which precludes a lender getting a deficiency judgment on any purchase money loan on residential real property.

A deed of trust is an interest in real property like any other. It can be sold, given away, attached or encumbered just like any other interest in real property. The method of transfer is the same for all purposes: the beneficiary of the deed of trust, who is also the holder of the promissory note on the property, executes an assignment of the deed of trust and has it recorded. Recordation of the assignment of the deed of trust transfers the deed of trust. It acts the same as a bill of sale for personal property or a grant deed for real estate.

When a promissory note secured by a deed of trust is paid , a deed of reconveyance must be recorded. The recording removes the deed of trust from the title to the property and places the title solely in the name of the owner. The trustee listed on the deed of trust or any successor trustee must sign a deed of reconveyance and then record it.

*** END OF SAMPLE VIEW OF SECTION ***

An installment sales contract is one where legal title stays with the seller until the contract is paid. In the event of the buyer's breach, this type of contract results in the forfeiture of the buyer's interest rather than a foreclosure on the property. Because of the harshness of the forfeiture, some states treat installment sales contracts as mortgages. These states require the seller to foreclose on the property in court in order to clear his title on the land.

If the seller elects to treat the property as a forfeiture, he is prevented by law from suing for damages or specific performance. The seller cannot keep the property and still demand payment for it. Clearly, an installment sales contract does not protect the buyer as well as a deed of trust or a mortgage. Sometimes, however, that is the only way the property can be purchased, especially where the seller is being asked to "carry back" the loan (take payments rather than sell for cash).

Many mortgages and deeds of trust contain clauses that state the entire balance becomes immediately due and payable if the property is sold or conveyed in any manner. The purpose of these clauses is to protect the lender from risky sales or assignments. These clauses have the effect of preventing the sale of the property without the lender's approval unless the lender's loan has been paid.

Federal law will enforce a "due on sale" clause if the loan is from a federally insured lender. Some states, such as California, have adopted legislation that prevent private lenders or state-chartered lenders from enforcing "due on sale" clauses if the value of the property exceeds the amount owed. Any trust deed which has a due on sale clause should be reviewed with an attorney familiar with the state's real estate law to determine if the provision is enforceable.

In the case of a mortgage debt, if the judicial sale does not completely pay the debt, the mortgagee can sue the mortgagor for the balance remaining (the deficiency). A number of states have limited the judgment in such cases to the difference between the debt and the foreclosure price. Some states, including California, have anti-deficiency legislation that prohibits deficiency judgments on purchase-money mortgages. A purchase-money mortgage is one used to buy the property rather than improve it.

Many states do not permit a deficiency judgment on a deed of trust where the property was sold under the trust deed's power of sale. If a deed of trust is foreclosed using a judicial foreclosure (suing in court for a judgment rather than selling the property under a power of sale in the trust deed), then a deficiency judgment may be possible provided there is no anti-deficiency legislation barring it.

An installment sale contract is treated like a mortgage in most states. In those states the seller is required to go through a judicial foreclosure to obtain a deficiency judgment. In other states the seller is permitted to foreclose without filing a foreclosure: the seller can sell the property under the terms of the installment contract and then sue the buyer for any deficiency as damages under breach of contract.

Whether the foreclosure is judicial in nature or by sale of deed of trust, it voids all junior liens and encumbrances. It does not affect a superior lien or encumbrance. For example, assume that George purchases a piece of property at a foreclosure sale on a second mortgage. The property had a first mortgage of $100,000 and a third mortgage of $50,000.00. The first mortgage still stays on the property, but the third mortgage is void. The holder of the third mortgage can sue the mortgagee personally for the balance owed on the third mortgage but cannot go against the new buyer of the property.

One form of common housing ownership is that of cooperatives. A cooperative is a corporation which owns the title to the land and buildings thereon. The cooperative leases apartments in its buildings to its shareholders. The residents in a cooperative are thus tenants (they lease apartments in which they live) and owners of the cooperative (they are shareholders in the corporate ownership of the apartments). The residents are not direct owners of their apartments. They are entitled to reside there only as long as they pay the rent and obey the terms of the lease that they execute with their corporation.

Another form of common ownership of housing units is condominiums. In a condominium each person owns the interior of his unit plus an undivided interest in the exterior and common areas. Usually the condominium owners form an association or corporation to manage the condominium. Each owner finances the purchase of his unit by a separate mortgage on that unit. The condominium association has authority to levy assessments against the owners for maintenance, taxes and other proper purposes. Failure to pay these assessments gives the association the right to lien the property and to sue in court to collect payment.

Most states permit an owner to claim a certain amount of equity in his primary residence, usually $40,000, as an exemption from attachment by creditors. In such states creditors cannot attach a debtor's home if a homestead declaration was recorded and the debtor's equity does not exceed the statutory amount. If the equity does exceed the statutory amount, the property is sold, and the statutory amount is returned to the debtor even if the debt is not paid totally. A declaration of homestead must be recorded in the county recorder's office of the county where the home is located prior to the filing of any lawsuit by a creditor. Recording the homestead declaration after the lawsuit is filed does not perfect the homestead or afford any protection from creditors.

Every buyer must be concerned with zoning in the area where the property to be purchased is located. Location determines price and the value of the location is itself determined by the zoning in the area. Every state has the authority to enact all laws reasonably necessary for the health, safety and welfare of its citizens. This is known as the state's police power.

Zoning is the term given to the laws enacted by a city, county or state that regulate the develop of land within its boundaries according to a general plan of development. The implementation of any zoning plan must comply with the constitutional provisions of due process and equal protection. If private property is taken for public use as a result of zoning, the owner must be paid the fair market value of the property. This is called eminent domain.

The government can so restrict the development of private property that no reasonable use of the property remains. In that event, the United States Supreme Court has held that inverse condemnation has occurred. Inverse condemnation is a violation of the U.S. Constitution's Fifth Amendment as a taking without just compensation. Such a violative taking for public purposes can occur if the government requires dedication of easements or transfers of portions of the property in order to get building permits when such easements or dedications have no relationship to the project sought to be built. This is the hottest area of contention in zoning law. Regulatory agencies routinely demand unnecessary public easements across private property or dedications of land in conjunction with those necessary to grant building permits.

A buyer should inquire how the area is zoned. A home located in an area zoned for industrial use will be worth less than the same home in a residential area. The reason is that most people do not want to live next to steel mills, oil refineries or stock yards. Homes located in industrial or heavy commercial areas will appreciate at a slower rate than those homes located in residential areas. Since appreciation is one of the reasons for purchasing property, zoning is a factor that must be considered in any decision to purchase a home.

Whenever a person buys property they should always buy the water and mineral rights of the property. All states permit water and mineral rights to be retained by a seller when property is sold: the seller will continue to own them even though the real property will be owned by the purchaser. In most states a person owning mineral and water rights has the right to go upon the property and develop them. If a person sells a 1,000-acre ranch and retains the mineral rights, he can go upon the property at any time and begin strip mining for minerals without having to pay damages for interfering with the surface owner. Such rights, however, can be limited by language in the deed that the seller retains the minerals but not the right to come on the surface to develop them (the right of entry). Where no right of entry is retained, the seller can only develop the property by subsurface access (digging a tunnel under the property or slant drilling a well).

Mineral rights are the ownership rights of all the minerals on a designated piece of real property. Mineral rights can be segregated from the land. Mineral rights carry with them a right to enter upon the real property surface or underground to search for and develop the minerals. This right of entry is called a "profit a prendre" and is a non-possessory interest in the land. A "profit a prendre" is an easement to enter upon and develop the minerals on the property. It can be terminated for the same reasons as an easement.

A riparian water right is the right of the owner of land bordering a stream to use all of the water necessary for his domestic purposes. The owner also has the right to use a reasonable amount of the water for non-domestic or business purposes provided he returns the water to the stream in an unpolluted state. The water from the stream may not be diverted beyond the watershed of the stream. A subterranean stream is treated the same as a surface stream. The owner has an absolute right to use as much water as he wants from water percolating to the surface. Many states, especially in the West, now hold that such use must be reasonable and that there may not be careless waste or pollution. Other states, such as Nevada, hold that all of the water belongs to the state and the owner of the land must perfect his rights to use the water on the property by application to the state.

The retention of mineral rights in homes located in cities usually is not a problem because zoning laws will usually prevent the seller from ever being able to mine for the minerals. In areas where mining is permitted, however, retention of rights could seriously affect the value of the property. Future buyers might not want to live under the threat of having their property invaded at any time. In the same vein water rights can be very important where water is obtained through wells rather than a water district. Buyers should be leery of purchasing property without access to water.

One of the most common forms of investment for individuals is the rental of real property. Most of the homes rented in the United States are not owned by huge real estate syndicates but by a husband and wife who are supplementing their income from the rental proceeds. There is no reason that individuals cannot invest and rent real property profitably.

The reason behind successful real estate rental is simple. Unless a person is living in a home he owns or is living with a relative, he is probably a tenant. For every tenant there is a landlord with superior ownership rights and control of the property. By renting property the landlord is supplying a basic need and should be amply rewarded for it. The degree to which the landlord is successful depends in large part on his management skill, the condition of the property, the location of the property, the investment in the property and the availability of other rental properties in the area. All of these matters must be given careful consideration before investing in real property.

At one time the landlord was supreme, and the tenant had virtually no rights in the premises. The property was rented "AS IS" under the doctrine of "caveat emptor": "buyer beware." The tenant's occupancy was based solely upon the payment of rent regardless of the condition of the property. Over the years courts and state legislatures have greatly eroded the landlord's omnipotent rights in the property. Tenants today have significant rights in their rented properties, and the violation of them by the landlord can result in serious fines and penalties. In addition many cities have enacted rent control laws which seriously restrict the landlord's right to charge other than a fair market rent or less and impair the value of the property.

This chapter is designed to help people with their decision to invest in rental property. It is also intended to help those already in the business to understand their rights and obligations under the law. This chapter is designed to help the user operate a rental property profitably. After all, this is the reason the property was rented in the first place.

There are only two real reasons for a person to rent real property, such as a home, to another person. The first reason is that the owner of the property wants to have someone on site to manage the property so that it will not be vandalized. This is an important reason. Any police officer will say that vacant buildings are prime targets for vandalism, dumping and other illegal activities. An owner is responsible for the acts committed on his property.

In many cities vacant buildings that have been vandalized or used by drug dealers have been condemned as nuisances and torn down. When that happens, the owner of the property is held responsible for the cost of the demolition.

The owner is doubly assaulted. In the first place the vandals destroy the building to such an extent that the owner cannot afford to repair it. In the second place the city destroys the building because of the damage caused by the vandals and bills the owner. The owner, though totally innocent, loses everything. It is clear why owners prefer to have tenants on the property to watch, even if they do not actually need the rental income.

The second and usual reason most people rent property is to make money. Real property is an asset and like any other asset can be used to make money. Real property can be sold and turned into cash, or it can be rented and generate a stream of income ad infinitum. Whether a person should get into the rental business depends whether he can make more money renting the property or investing elsewhere. In making that determination, several factors must be considered:

1. How much rental can be charged for the property.

2. How likely is the property to be rented.

3. What are the maintenance charges and taxes on the property.

4. What is the condition of the property.

5. What is the depreciation on the property.

6. What is the return on the investment.

Whether a person buys the rental property or inherits it, the property is an asset with value. The rental property should be sold if it does not generate a reasonable return on its value. In the 1970's and 1980's many real estate gurus touted negative investment in real estate. These experts advised people to invest in rental property even if the rental income would not make the payments. These experts believed that the owners should make up the difference because they reasoned that the unimpeded escalation of real estate prices in the major markets would continue forever. Their cry was, "The only thing they're not making any more is land." These experts believed that the owners would make a huge killing when the land was ultimately sold through astronomical appreciation occurring on real estate.

In all fairness that did happen for a few years and many people did make killings in real estate. Many investors, however, financially died by following that advice. When the savings and loan industry collapsed in the 1980's, real estate throughout the United States plummeted. The Federal Resolution Trust Corporation (FRTC) took over the failed savings-and-loan industry list of properties and sold them at bargain rates. As real estate prices collapsed, tenants found they could rent homes and other real property cheaper and moved. This left the owners with negative investments in a precarious situation. They were forced to reduce their rents to keep tenants and pay more out of their pockets to meet their high mortgage payments or default on their loans and lose the property. Many of the owners lost their property to the Resolution Trust Corporation who then sold at depressed prices. This action by the FRTC drove the real estate prices ever lower. The savings-and-loan system collapse cost thousands of real estate investors their life savings.

The example of the savings-and-loan debacle shows that no one should ever invest in real estate in a financially negative fashion, nor should they rely on appreciation in the property for their profit. A real estate investor should expect a reasonable profit from the property immediately and should not expect an appreciation for sale but instead expect the property to retain the same value. If the property rises in value that should be viewed as a Godsend, but it should not be expected. The property should be sold if it drops in value so that it no longer generates a reasonable return.

*** END OF SAMPLE VIEW OF SECTION ***

Once a person decides to rent property to another, the owner should execute a written lease with the potential tenant. By definition a lease is a transfer of real property for a period of time, called tenancy, by a person with a greater interest in the real property. The person granting the lease is called a landlord or lessor. The person receiving the lease is called a tenant or lessee. The consideration paid for the lease is called rent. The rights of the parties to a lease are governed by the specific type of lease that is used and the terms and conditions of the lease contract.

The lease should always be in writing although, by law, a written lease may not always be required. The Statute of Frauds, a law adopted by all states, requires a lease greater than one year on real property be in writing to be enforceable.

There are exceptions to the requirement of a writing. The most important exception is that of a lease. In such a situation, the lease or contract will not have to be in writing in order for its terms to be enforced. Although not always required by the law, common sense dictates that all leases be in writing for the benefit of the landlord. All-purpose leases are sold in all stationary stores for approximately five dollars; so it makes sense to use them to avoid potential problems.

A periodic tenancy is a lease that runs from period to period such as month to month or year to year. It is automatically renewed for another period until terminated. Termination of a periodic tenancy occurs by giving proper notice to the other party of the intent to terminate the lease prior to the end of the current term. In most states, unless the parties agree otherwise, the notice requirements for the termination of a periodic tenancy are:

1. For a month-to-month lease, 30 days notice.

2. For a quarter-to-quarter lease, one quarter's notice.

3. For a year-to-year lease, six months notice.

Unless valid notice is given, the landlord cannot evict a holdover tenant from the premises. For example, For a month-to-month tenancy, the landlord must give 30 days notice before the expiration of the term or else the lease does not legally terminate. The tenant has a right under the law to remain on the premises until a valid notice is given by the landlord.

A tenancy-at-will is a lease in which either party may terminate at any time. Unless the parties have expressly agreed that they intend the lease to be a tenancy-at-will, the court will treat it as a periodic tenancy. A tenancy-at-will terminates by operation of law when:

***END OF SAMPLE VIEW OF SECTION ***

The common areas of multi-unit buildings are not part of a tenant's leased property. The responsibility remains with the lessor to maintain the common areas in a safe manner. This would affect an individual lessor when he is renting a duplex, triplex or other multi-tenant property. There are always areas of shared access which come under the auspices of the landlord.

Lessors have been found liable for negligence in maintaining the common areas when injuries occurred. The lessor must use ordinary care to make the area safe for tenants and invitees (business guests) to the property. The latest extension of liability for common areas occurred when courts found lessors liable for crimes committed by third parties. The California courts have held, for instance, that lessors were negligent when they failed to install locks on gates leading to the property. Criminals went through those gates and attacked a woman tenant. The courts held that the landlord knew the property was in a high crime area and should have taken the minimum precaution of installing locks on the gates.

Every lease agreement contains an implied covenant of quiet enjoyment. The covenant implies that the landlord will do nothing to interfere with the possessory rights of the tenant. In other words, if there is something that affects the tenant's right to enjoy the property quietly, and it is within the landlord's reasonable power to correct the situation, the landlord's failure to correct is an interference with the covenant of quiet enjoyment.

Constructive eviction is some act or failure to act by the lessor when he has a duty to act which makes the property uninhabitable. The following conditions for constructive eviction must be met:

1. The act or failure to act must be by the landlord or his agent, not third parties.

2. The results of the act are to render the property uninhabitable.

3. The tenant must vacate the premises as a direct result of the landlord's act. If the tenant does not vacate there is no constructive eviction.

A tenant may declare the lease terminated because of the constructive eviction and sue for damages suffered as the result of the eviction or sue for the return of possession of the property and damages suffered. The covenant of quiet enjoyment and constructive eviction go hand in hand. Simply, constructive eviction is such a serious violation of the tenant's right to quiet enjoyment that the tenant must move. The best example is the violation of housing codes which make the property uninhabitable. In such an event, the landlord may be sued by the tenant for the costs of having to vacate the premises.

Based upon the foregoing discussion, a landlord should make sure that the property is maintained in accordance with the appropriate housing codes and should exercise common sense. If the property is maintained in accordance with those minimum standards, the landlord will have nothing to fear in court. Furthermore, the costs of such maintenance are deductible business expenses which actually improve the life expectancy of the property. Slumlords who fail to maintain their property are sacrificing reasonable and steady long term growth for short term profits.

A tenant has no duty to make any substantial repairs to the property unless the lease agreement imposes an express duty to do so. The tenant does have the duty to make minor repairs and to take other steps necessary to prevent damage by the elements. If the tenant does not make the minor repairs, the tenant will be liable for the damages caused because the minor repairs were not made. He, however, will not be liable for the actual cost of making the repairs.

***END OF SAMPLE VIEW OF THIS SECTION ***

When a tenant abandons property with time still remaining on the lease, the landlord has the following options available:

1. The landlord may consider the abandonment as an offer to surrender the property. If the landlord accepts the surrender and resumes possession of the property, the tenant is relieved of further liability on the lease. The fact that the landlord enters the property to make repairs or offers to rent the property to another on behalf of the tenant does not constitute acceptance of the surrender.

2. The traditional option, still available in many states, allows the landlord to do nothing and simply sue the tenant each month for the rent as it becomes due or wait for the end of the term and sue for the whole amount.

Many states require a landlord to attempt to mitigate his damages and try to rent the premises and apply the rent received to the damages owed by the tenant. The tenant is then liable for the difference. If the property cannot be rented, the tenant is liable for the full remaining rent owed for the unexpired term of the lease.

Retaliatory eviction is the eviction of a tenant for reporting housing codes violations to the proper authorities. Many states, such as California, make it illegal for a landlord to evict a tenant for reporting housing code violations. In many states a landlord may be fined for committing a retaliatory eviction. Many defendants in an unlawful detainer action allege retaliatory eviction as a defense even though it may not exist. A "retaliatory eviction" defense goes hand in hand with the "implied warranty of habitability." Tenants often claim that they refuse to pay rent because of the substandard condition of the property. If the claim is true, the landlord may be prevented by law from evicting the tenants and be precluded from collecting rent until the premises are improved to the standards of the housing code.

It used to be permitted for a landlord to lock a tenant from the premises after the lease expired. This form of self-help was widely used. A person need only to look at the movies of the 1940's and 1950's to see how hold-over tenants were then treated. It was a routine practice in the past to evict tenants behind in their rent.

Few states now permit a landlord unilaterally to evict a tenant. All states have unlawful detainer statutes to evict tenants wrongfully in possession. The unlawful detainer action is a summary procedure and is given preference on the court's calendar. Most states today recognize that unilateral eviction can result in breaches of the peace and have abolished it altogether. Most states have created a tort (civil wrong) for "forcible entry and detainer" to prevent a landlord from resorting to unilateral eviction of a tenant. "Forcible entry and detainer" is a tort whereby a person, usually the landlord, unlawfully evicts a tenant from the leased premises. States which do not permit unilateral eviction remedies to the landlord will find the landlord liable for damages if he forces a tenant to be evicted or interferes with his possession of the property. California, for example, makes it a crime for a landlord to shut off utilities to a tenant for any reason and fines a landlord $100 per day for any "forcible entry or detainer" act.

If the landlord wins in an unlawful detainer action, the court will enter a judgment in the landlord's favor. The court will also issue an order that the tenant vacate the premises by a certain date. The clerk of the court will issue a certified order called a "writ of possession."

If the tenant fails to move out by the allotted time, the landlord takes the writ of possession to the local sheriff or marshall's office. A police officer will be dispatched to oversee the removing of the tenant's possessions from the premises. The tenant's possessions are taken from the premises and either left on the street (if the tenant is present) or placed into storage and sold to cover their storage fees after a statutory waiting period (if the tenant is not present).

A security deposit is a payment in addition to rent that is a guarantee against damages to the premises. From this security deposit the landlord pays to repair any damages caused by the tenant. A security deposit is not rent. The purpose of the security deposit and its uses are clearly defined by statutes in most states. Many states require a security deposit to be kept segregated in an interest bearing account. A security deposit is refundable. The laws of many states, including California, impose penalties on the landlord that wrongly fails to return a security deposit which, in most states, must be refundable.

A landlord is required within a matter of days (usually 10) after termination of the lease to inform the tenant in writing as to how the security deposit was applied to satisfy the damages allegedly caused by the tenant. The landlord then must return the balance of the deposit. If the tenant feels that more of the security deposit should have been returned, the tenant should sue the landlord in small claims court for the amount in dispute plus any damages that the state law imposes on a landlord for misusing a security deposit.

A fixture is personal property that is attached to the real property in such a way as to be considered a permanent part of the real property. Under common law all fixtures became the property of the owner of the property. Thus any improvements to the real property that were made by the tenant are owned by the landlord and cannot be taken by the tenant when the lease ends.

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Under the common law a landlord was not given a lien on the tenant's property for unpaid rent. The laws of many states now give a landlord a lien for rent on the property of their tenants and on the crops grown on the leased land. The tenant still retains legal title to the property along with the right to possession, but a lien is attached to them.

The property to which the statutory lien of a landlord may attach depends on the statutes of each state. Most states that allow the lien permit it to attach all of the tenant's property on the leased premises. A few states limit the landlord's lien to certain types of property: growing crops on the leased land, fixtures used in a trade or business, or animals on the leased land.

The statutory lien must be enforced in accordance with the laws of the state involved. A lawsuit must be filed for enforcement. In some states recording a notice or filing a UCC-1 form with the secretary of state will serve to give notice to the world of the lien. Such notice will prevent the property from being sold without the landlord being paid. The lien gives the landlord some preference as a secured creditor should the tenant file for bankruptcy.

A landlord may waive his statutory lien both intentionally by his express agreement or unintentionally by his conduct. In most of the states that permit the lien, if a landlord permits the tenant to remove the property without asserting the right of his lien, the lien is waived forever on that property. When the landlord permits the tenant to sell the property on a promise that the proceeds will go to the landlord, the court will find a waiver. If the tenant then decides not to pay the landlord, the landlord must still sue the tenant.

Money is hard to get and even harder to keep. Therefore, everyone should always pay their just debts. Unfortunately, many people are professional deadbeats. These people deliberately run up debts for services or property and refuse to pay. Such people count on the fact that litigation through the normal court system is expensive and that it would usually cost more to collect the debt than it is worth. The cost for an attorney is usually at least $150 per hour. The normal debt collection runs at least $5,000 in attorney costs. Unless there is a written agreement that the prevailing party will get attorney fees, each side must pay their own attorney fees. It is this reality that the unscrupulous use to avoid paying their just debts.

In response to this situation, all states have adopted laws establishing small claims procedures. Under these laws, small claims, usually no more than $5,000, are heard before special judges, commissioners or attorneys serving as judges pro tem. The small claims court employs simplified procedures which make it easier for the parties to present their cases. Small claims courts are truly the people's court. For most individuals a small claims appearance will be their only contact with the judicial system except for the occasional traffic ticket.

Small claims court exists as an alternative to the highly structured, complex and expensive traditional court system. Small claims courts are a cheap, fast and efficient means to settle disputes concerning small amounts of money.

There are many "How To" books on the market that instruct a person as to what he must do to file a small claims action. This chapter addresses most of the fundamental concerns people have concerning small claims court without having to buy expensive books that merely expand this information. Through this chapter the average person should be able to understand the small claims court procedure. The reader should be able to go to the clerk of the small claims court, get the forms and the local rules of court and intelligently start the action.

The reason this chapter is appearing in this book is to educate people on the advantages and simplicity of the small claims court. There is no reason that a person should forgive debts of hundreds or thousands of dollars because it is not cost effective to hire an attorney to sue for such money. Money represents a person's future and safety. Money's protection and its recovery from those who should not have it makes the knowledge contained in this chapter vital. Knowledge is power, power is money, and money is security. It is important to know how to go to small claims court to preserve one's financial interest.

The small claims court is a specially created court in which most disputes can be tried inexpensively and quickly. The rules of the court are simple and court procedure is relatively informal. Lawyers are not permitted to present or try the case. Claims vary from state to state. In California, for instance, disputes of $5,000 or less can be heard in small claims court. The regular filing fee for most small claims courts is between $6 and $15.

A small claims case is usually heard within forty (40) to seventy (70) days from the filing of the claim. While most small claims cases involve money damages, most small claims courts have the power to grant other remedies. For example, most small claims courts have the authority to grant injunctive relief which means authority to order a person to do or not do something (mandamus or injunction) if the value of the act ordered or restrained is within the monetary limits of the court.

Nearly anyone can sue in small claims court. The person bringing the suit is called the plaintiff and the person being sued is the defendant. An individual can sue other individuals or businesses and vice versa. Most states deny collection agencies the right to sue in small claims court, nor can someone file a small claims action for another. Most states deny assignees, persons who buy the debt of another, to sue in small claims court for collection of that debt.

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The plaintiff must state the names and addresses of the defendants: the people or business being sued. Therefore, the plaintiff must know the identity of the defendant. If the defendant is a business or corporation, the business' legal name and address can be found with the city's licensing agency, the tax assessor's office, the fictitious business names files in the county clerk's office, or the office of the secretary of state's corporate division. All corporations incorporated in a state and foreign corporations doing business in a state are usually required to designate a person to receive process (service of complaints) for the corporation.

The correct names and addresses of the defendants are needed so they can be properly identified and served with the complaint, which is required before the court will hear the case.

Because attorneys generally are not permitted in a small claims action, both parties must represent themselves. In the same vein a corporation may appear in small claims court only through an employee or an officer or director of the corporation. A corporation may not be represented in small claims court by someone whose job is to represent the corporation in small claims court. In other words, a corporation cannot use an attorney in court if the function of the attorney is to represent the corporation on small claims actions.

Certain businesses and entities other than corporations, such as partnerships or joint ventures, may appear in small claims court only through a regular employee of the entity. The representative may not be someone whose sole job is to represent the business entity in small claims court. A trust may be represented in small claims court by the trustee of the trust.

The most important consideration in a small claims case is the amount of the claim sought. A plaintiff cannot exceed the jurisdictional limit of the court. If a plaintiff asks for more than the court is allowed to award, the entire case may be dismissed. If the plaintiff sues for less than is owed, he forever waives the balance. For example, assume that the plaintiff is owed twenty thousand dollars ($20,000) and sues for five thousand dollars ($5,000), the plaintiff forever loses the right to sue for the remaining fifteen thousand dollars ($15,000). The plaintiff could have sued in a regular court for the full $20,000, but he might have waited years to have the case heard and incurred large fees and costs preparing for the trial.

There is always a filing fee for any complaint filed in any court. Courts are not free. In California the basic fee is $6 per case. Multiple filers, those with over 13 cases per year, $12 per case in California. In most states a person unable to pay the filing fee can request the court grant a waiver of fees. This waiver is called a "forma pauperis," Latin for "form for a pauper." If the plaintiff qualifies for the waiver, the fee is waived and subsequently recovered if the plaintiff wins. Put it another way: if the plaintiff wins the case, the defendant pays the filing fee as a court cost to the plaintiff.

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A defendant must be served (presented the small claims complaint) in such a manner that the court will know that it was done. The procedural requirement must be correctly followed or the action may not proceed and may be dismissed altogether.

A plaintiff cannot serve the small claims action on the defendant. In some states, such as California, the court clerk will mail the complaint to the defendant's address by certified mail. Service is complete if the defendant signs for it. The fee for this is $3 in California. If the defendant does not accept delivery of the certified mail, the plaintiff must serve the defendant with the small claims complaint in another way.

The defendant can also be served by personal service. Personal service requires a person over 18 years of age to deliver the complaint to the defendant personally. A sheriff will do it for about $25 or a commercial process server will do it for about $50. Once the complaint is filed, a proof of service is filed with the court stating the date and location of service. The case will not be dated for trial until proof of service is filed with the court.

In most states the defendant may be served by substitute service. Substitute service requires the process server to leave a copy of the complaint with an identified person at the business or residence of the defendant and to mail a copy of the complaint to the defendant at that address within 10 days. Proof of service must be filed by the process server stating the name of the person who accepted the complaint.

If the defendant does not appear at trial, the court first will determine if the defendant was properly served. The court will determine if service was valid. If service was procedurally invalid, the court will dismiss the case for want of jurisdiction over the defendant. If service was valid, meaning the complaint was properly served on the defendant, the case will continue.

Judgment is not automatic for the plaintiff just because the defendant fails to appear. The plaintiff must still put on evidence proving his entitlement to damages. This is called a "prove up" hearing. The judge will hear only the plaintiff's case and decide if damages should be awarded. Just because a defendant does not appear does not mean that a judge can award damages. Perhaps the plaintiff cannot show liability or there would be a violation of state or federal law.

If the plaintiff wins the action, the court will issue its judgment. Part of the judgment will be an award for the damages suffered by the plaintiff, the court costs in bringing the suit and the amount of interest permitted under state law.

The defendant may file a claim against the plaintiff in small claims court. The claim does not have to be over the same fact pattern as the plaintiff's claim. Example: The plaintiff may sue over a car accident, and the defendant may countersue over a broken refrigerator totally unrelated to the car accident.

The defendant's claim is subject to the same restrictions as the plaintiff's claim. The defendant may not sue for damages over the court's jurisdictional limit and must comply with the statute of limitations. Any amount exceeding the limit is forever waived, as with the plaintiff's claim.

The defendant may file his complaint in the regular courts, municipal court, superior court, district court or whatever that state calls its courts or even in federal court if appropriate. The plaintiff's small claim action will be transferred to the regular court if it arises from the same fact pattern as the defendant's action. In regular court the plaintiff may then increase his claim for damages and hire an attorney to handle the action as a regular lawsuit.

Most small claims court judges are full judges of the local court. Many states permit private attorneys to sit as temporary small claims court judges called judges pro tem. In order to hear a small claims case as a judge pro tem, the attorney must have the written consent of both parties. If both parties agree to have a private attorney serve as the judge, the attorney will hear the case and render the decision in the same manner as a regular judge. The judgment of an attorney serving as a judge pro tem is treated for all purposes as a valid court judgment. Generally, pro tem judges are not used if the case is to be tried by a jury.

If the parties do not stipulate to the use of a private attorney, the case will be continued to a time in the future when a regular judge is available. Usually, the first notice to the parties that a regular judge is not available is on the date of trial, when the clerk asks the parties to stipulate to a private attorney.

In most states, including California, a plaintiff may not appeal the judgment of a small claims action. If the plaintiff loses, the case is over and cannot be relitigated.

The defendant, however, can appeal the judgment of a small claims court. Usually in an appeal, the case is retried in a regular court and before a real judge. The new trial is called a "trial de novo", which means a completely new trial. In California, small claims appeals are heard in Superior Court. In California, when a small claims case is appealed, both parties may then use attorneys, but that is the exception to the general rule that attorneys may not appear in small claims cases.

In like manner, a plaintiff is entitled to appeal a judgment against him awarded to the defendant on the defendant's claim, and a defendant is not entitled to appeal a loss of his claim against the plaintiff: the defendant's counterclaim places him in the position of plaintiff. For example, assume that a plaintiff sues a tenant for $3,000 back rent. The tenant, who is the defendant, sues the plaintiff for $2,000 retaliatory eviction. The court rules for the defendant and awards him $1,500, and he cannot raise the argument that he should have been awarded more.

Some states, such as California, permit a judge to fine a defendant for filing a frivolous appeal. In California, if the court finds that the appeal was frivolous, it can award the plaintiff $250 as attorney fees. It is rare that the court will find the appeal was frivolous. "Frivolous" means the appeal was without merit and intended solely to harass, delay or encourage the other party to abandon the claim. If state law permits sanctions for filing a frivolous small claims appeal, there is no harm in asking for them.

Once the court issues a money judgment, the prevailing party, the person being awarded the money, becomes a judgment creditor of the losing party, who is now the judgment debtor.

The judgment may specify that the amount of money is to be paid in full to the judgment creditor or allow the judgment debtor to make periodic payments. Periodic payments are usually ordered in the judgment only if the parties entered a settlement agreement ordering them. Interest is usually computed on a judgment from the date of its award. The legal rate of interest varies from state to state but is around 10% per year.

Once the judgment is issued it is up to the judgment creditor to collect. Collecting a judgment is the most frustrating part of the small claims process. A judgment does not guarantee payment. A judgment debtor may be without assets, "judgment proof", or be uncooperative, causing extra effort or costs.

The court is not a collection agency. It will not collect the award for the judgment creditor. It will supply orders and documents to help collect the judgment. Often an attorney or collection agency is hired to collect the judgment.

The court issues its judgment in favor of the prevailing party. The prevailing party is the winner and can be the plaintiff winning on his complaint or the defendant winning a judgment against the plaintiff on the defendant's claim. The judgment is taken by the winner to the clerk of the court. The clerk of the court issues a writ of execution containing the information in the judgment.

A writ of execution is a court order directing the sheriff or marshal to take control of or levy upon the assets of the losing party to satisfy the judgment. It is the responsibility of the judgment creditor to tell the marshal or sheriff where the property is located so it can be seized.

Wages can be attached ("garnished") to pay the judgment. Most states have laws to prevent employees being fired because their wages have been attached.

All states provide debtors statutory exemptions from collections. A debtor is allowed to earn a certain amount of money in wages and have a certain amount of property that cannot be attached or seized to satisfy the judgment. Only property over these statutory amounts can be taken to satisfy a judgment.

Real property can be seized and sold by a marshal or sheriff executing a small claims judgment. Every state has its own procedure for execution on real property. The sheriff or marshall advertises in a newspaper of general circulation that on a certain date (usually after 30 to 60 days notice to the debtor) the real property will be sold to the highest bidder at a public auction at the sheriff or marshal's office.

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When a debtor files bankruptcy, there is an immediate "automatic stay" on any collection lawsuits being filed against the debtor. A person in bankruptcy cannot be sued in small claims court. Any judgment taken against a person while a bankruptcy proceeding is pending is void and unenforceable.

Furthermore, under the bankruptcy law, all judgments obtained within three months of a debtor's bankruptcy are set aside and must be relitigated again in the bankruptcy court. Older judgments are treated as unsecured claims in the bankruptcy proceeding except for judicial liens against real property. That means they are paid in a percent equal to the ratio of debts to assets in the estate after secured debts and allowable expenses have been paid. Assume, for example, that a creditor has an unsecured judgment of $4,000 against a bankrupt debtor. Assume the bankrupt debtor's estate is $20,000 after payment of all allowable debts and expenses and the unsecured debts are $80,000. The creditor's debt will be 5% of the distributable estate: $1,000. Moral: A creditor should attempt collection immediately after the judgment is obtained in order to assure full recovery.

When everything works right, the party with the judgment, the judgment creditor, is paid in full or whatever lesser amount that might be agreed among the parties. The judgment creditor is required to file a form with the court after the judgment has been paid, called a "satisfaction of judgment." The recordation of satisfaction of judgment removes the liens placed on the debtor's property by the prior recording of an abstract of judgment.

Failure to record a satisfaction of judgment could expose the judgment creditor to a lawsuit for slander of title. Failure to file (record) the satisfaction of judgment would keep a lien on the debtor's property and thus prevent the defendant from obtaining loans or selling his property. Such would make the creditor liable for extensive damages.

It is the judgment creditor's responsibility to collect the award, and the creditor is given certain rights that help him. Many courts require the debtor to file a statement of assets once the judgment is entered. Using this statement of assets, the creditor is able to obtain the writ of execution from the court clerk. All states permit the creditor to apply for an "order to appear for a judgment debtor's examination." This is a court order for the debtor to appear on a certain date and time to be questioned under oath about his money and property.

A judgment debtor's exam is usually limited to one every six months until the judgment is satisfied. In addition, most states require a debtor to file a financial statement and list all of the assets he owns. A debtor is required to file it as a tool for the creditor in discovering property that can be seized and sold to pay the judgment.

Small claims courts were established primarily to handle bad check complaints. These are complaints for bad checks of relatively small amounts. Most people have seen a list of bad checks in small restaurants to embarrass the writer. Every state has some type of bad check law that permits a business, and in some instances individuals, to sue for several times the amount of the bad check. In California, Civil Code Section 1719 permits a suit to be filed for value of the check plus three times the amount of the check. The additional amount will be at least $100 with a maximum of $1,500.

Some states, like California, require that the debtor be given notice by certified mail of the bad check before the court will award the additional amount. Anyone given a bad check can always sue in small claims court for the amount and for the penalty also.

This section deals with the most common types of investments the average person might consider. Not every type of investment is discussed. This book is not directed toward wealthy individuals. Such will have financial advisors to render advice on investments far more complicated and expensive than the average person can afford. This book is aimed at the middle class person who cannot afford to pay $150 per hour to financial planners to invest $50 per week.

The only assured way to die wealthy is to save slowly. The investments discussed herein are not get-rich-quick schemes. There are a few sure means of getting rich but they are very hard to achieve with certainty such as winning a lottery or marrying a wealthy spouse. There is a line in an old Three Stooges movie where Curly opens a book entitled, "How to Make a Million." He reads, "How to make a million: find someone with two million and ask for half." If such advice works, it's great advice.

The advice herein is basic and simple. Essentially, it can be summarized as "pay as little taxes as legally possible and invest all disposable money in good stable investments". As to the investments that a person may choose, the most common are discussed in this book. There are discussions on stocks, bonds, mutual funds, money market accounts, commodities, limited partnerships, annuities, and real estate investment trusts among others. Both benefits and risks attendant to each type of investment are discussed. There is no reason why a careful, prudent investor cannot develop a financial plan to accomplish steady, safe growth of an estate. It is toward that end that this book is directed.

Limited partnerships are one of the most popular forms of investments. A limited partnership shares some of the characteristics of both a general partnership and a corporation. A limited partnership is neither a general partnership nor corporation. It also has certain investor drawbacks that neither of the above possess.

Investments in limited partnerships have resulted in a great deal of litigation over the propriety of the actions taken by the general partners. A true example of such was a California lawsuit for an accounting brought by some of the limited partners against the general partners concerning operation of a public golf course. The general partners had entered a special operating agreement with the golf course and received substantial benefits without disclosing that fact to the limited partners. After discovering the existence of the special operating agreement, the limited partners brought a lawsuit alleging that the arrangement violated the fiduciary duties of good faith and fair dealing which the general partners owed to them. This was a complicated case that occurred because neither the general nor limited partners fully understood their respective rights and obligations under California partnership law or the partnership agreement.

This chapter is dedicated to providing the basic information as to what limited partnerships are, how they operate and the role which a limited partner plays. People invest in limited partnerships to make money while not taking needless risks with their investments. This chapter is geared to explaining how limited partnerships operate so that the average person can understand the presentation of a person selling a limited partnership and be able to evaluate the true risks and rewards of the investment.

The National Conference of Commissioners on Uniform State Laws wrote the Uniform Limited Partnership Act (ULPA). Also created was the Revised Uniform Limited Partnership Act (RULPA). One of these acts has been adopted by every state except Louisiana. In addition, the Uniform Partnership Act applies to limited partnerships except where it is inconsistent with provisions of the ULPA or RULPA or state law.

The ULPA and RULPA provide the rules on how a limited partnership is to operate in situations not covered in the limited partnership agreement: the ULPA and RULPA fill the blanks of a limited partnership agreement. The partners can agree not to use some of the ULPA provisions. There are some ULPA and RULPA provisions required by state law that cannot be altered or stricken from a limited partnership agreement.

A partnership, whether general or limited, is two or more persons or entities working together as co-owners to run a business for profit. The Internal Revenue Code defines a partnership in Section 761(a) as:

"A syndicate, pool, joint venture or other unincorporated organization through which...any business is carried on... and is not a corporation, trust, or an estate (meaning sole proprietorship)."

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