Judge Roger Toulson QC overturned Camden LBC decision in May last year that Rosa Aranda was 'intentionally homeless' and had no right whatsoever to be given a new council home.
The council was wrong to conclude that the 47-year-old mother had 'unreasonably' vacated the Colombian bungalow after her marriage broke down before returning to Britain, the judge ruled.
He ordered the council to reconsider whether or not it had a duty to rehouse Mrs Aranda and her 11-year-old daughter, Lenora.
Mrs Aranda, who has dual British and Colombian nationality, 'reluctantly' moved to Colombia with her husband and daughter in May 1994 after living in England for 22 years.
The couple were given a House Purchase Grant of £20,000 by Camden LBC in exchange for them vacating their two bedroomed council flat in Churchway, Camden.
They invested the cash in a £40,000 bungalow in Medellin, Colombia, added the judge.
But in South America, Mr Aranda 'made no efforts to find a job and spent his time visiting friends and family'.
Finally his wife 'learned he was having an affair.'
'It became apparent that the marriage was at an end and he was not going to provide her with any financial support.'
By November 1994, Mrs Aranda was down to her last £1,000, and spent the money on tickets back to England for herself and her daughter, said the judge.
'On her return to England she lived with a friend and then applied to the council for housing as a homeless person,' he added.
In May last year the council accepted that she was homeless and in priority need, but ruled her 'intentionally homeless' and thus ineligible for another council home.
The judge said it was the council's case that Mrs Aranda had 'taken no steps' to sell the bungalow in Colombia, in which she still has a beneficial share, and which is currently being rented out to cover the £20,000 mortgage.
Camden also took the view that she 'knew perfectly well of the risk she was taking and voluntarily accepted that risk,' when she vacated her council flat and moved to Colombia.
But the judge ruled: 'I have no doubt that the council's thinking was influenced by the fact that she obtained a grant of £20,000 for ending her tenancy.
'The council felt there was something basically wrong if she could obtain a grant of £20,000 to buy her own accommodation, put the money into the property, retain the investment and then require the local authority to secure accommodation for her as a homeless person.'
But by adopting that approach the council had 'misdirected itself' on the question of whether or not it owed a duty to rehouse Mrs Aranda and her daughter.
The judge overturned Camden's decision that Mrs Aranda was intentionally homeless, and the council was ordered to reconsider her case.