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REAL ESTATE MAILBAG Robert J. Bruss

The neighbor's tree trimming cannot be so severe it will kill the tree. If that happens, the "trimmer neighbor" is liable to the tree owner for the lost value damage and removal cost of the dead tree. For full details, please consult a local real estate lawyer.

DEAR BOB: You recently told a reader she was not entitled to deduct the mortgage interest and property taxes on a residence purchased by her parents for her many years ago. We are both accountants, and we disagree with you for two reasons: (1) Internal Revenue Code Regulation 1.163-1(b) says a taxpayer can deduct interest paid on a real estate mortgage if he is the legal or equitable owner of the property even if he is not directly liable on the mortgage, and (2) the 1997 Tax Court decision in Uslu (T.C. Memo 1997-551) allowed deductions to a couple who asked a brother to buy their home (they had bad credit) on which they paid the mortgage and property taxes. The court ruled the couple was obligated to the brother to make the mortgage payments and allowed their tax deductions. Also, your reader should be entitled to the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 ($500,000 for a married couple filing jointly). -- Ted DeM. and Gary B.

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DEAR TED AND GARY: Thank you for your thoughtful, well-reasoned e-mails. Now you know why I constantly advise readers: "For further details, please consult your tax adviser."

IRC Regulation 1.163-1(b) provides deductions where the property owner has not formally assumed an existing mortgage or is purchasing the property as an "equitable buyer" under a land contract of sale but does not yet hold title. I doubt it means a daughter whose father bought a house for her under an oral agreement is an equitable owner.

Regarding that Tax Court decision, based on substantially different facts, I question if the IRS would accept it as precedent for the situation where the father made an oral property gift to his daughter.

As a newspaper columnist, I would be remiss if I advised that reader: "Go ahead. Claim the tax breaks for mortgage interest and property taxes although you don't own the house except for an oral agreement." As for claiming the Internal Revenue Code 121 principal-residence-sale tax exemption, in my humble opinion, that's really a long stretch.

DEAR BOB: I am thinking of doing an Internal Revenue Code 1031 tax-deferred exchange of a rental property in Florida and a rental condo in Washington to purchase a home I can eventually reside in. The twist is I want to add my son's name to the title and mortgage on the acquired property to help him establish credit and responsibility. Is this addition of my son to the title possible? -- Michael W.

DEAR MICHAEL: Please don't add your son's name to the title of the rental property you acquire.

You can qualify for an IRC 1031 tax-deferred exchange of two rental properties for one rental property of equal or greater cost and equity. But adding your son's name to the title of the acquired property probably will disqualify the tax-deferred trade.

Don't do it. Did I make myself very clear?

The acquired qualifying property must be a rental at the time of the tax-deferred exchange. Later, you can move into that property to convert it into your principal residence. Then, if you wish, you can add your son's name to the title. However, if you then want to add his name to the mortgage, the lender might require an assumption fee.

To anticipate your next question, "How long must the acquired property remain a rental?" the answer is "Nobody knows for sure." Recently, I asked that question of two IRS officials in Washington on a conference call. The official answer I received was: "That is a matter on which the IRS does not give official guidance." But most accountants suggest renting the acquired property at least six to 12 months to show rental intent before converting it to your personal residence. As always, please consult your tax adviser.

DEAR BOB: You recently ran an item in which you said a real estate investor does not need a state license. According to my information, you response is correct if the investor is the only party to the transaction holding title. However, if the investor purchases a property with other investors and he collects the rents, then the party collecting the rents must either be licensed or an attorney. Is this issue enforced by the license authorities? -- Beemish S.

DEAR BEEMISH: You are correct. But the original question asked if a real estate investor must hold a real estate license. We agree the answer is "no."


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