Real Estate Mailbag

By Robert J. Bruss
Saturday, February 25, 2006

Q: DEAR BOB: Many real estate sales contracts provide for mediation or arbitration of disputes that might arise after a sale is closed, such as alleged misrepresentation of a property. Do you favor either mediation or arbitration of disputes, rather than going to court? -- Reginald W.

A: DEAR REGINALD: The trend is toward mediation or arbitration of real estate sales disputes, rather than court trials, which can be expensive and time-consuming. Many printed realty sales contracts allow the buyer and seller to agree to mediate or arbitrate disputes, which might arise later, such as when the seller allegedly fails to disclose a known defect in the home to the buyer.

Mediation means an expert mediator attempts to get the parties to agree on a fair settlement of the dispute. But the mediator has no legal authority to force an agreement. Because most informal mediations are resolved within a day or two, the cost is far lower than a court lawsuit. If the mediators successfully resolve the dispute, they should insist all parties sign the settlement agreement before leaving the mediation, to prevent later misunderstandings or change of mind.

Binding arbitration is different. Before going to trial, the parties can agree to arbitrate their dispute. The arbitrator, chosen by mutual agreement, hears the evidence of both parties and then renders a binding decision, which is then presented to the local court for confirmation. Although arbitration is usually less expensive and faster than a court trial, the parties give up their legal right to a jury trial, appeal of the arbitrator's decision, and court procedures and evidence rules.

As a lawyer, my opinion is that it is fine to agree in a real estate sales contract to mediate any disputes that later arise between the parties. However, I do not favor agreeing in advance to give up important legal rights and to arbitrate future disputes. If a dispute later arises that is not resolved by mediation, at that time the parties can then agree to binding arbitration. But I don't think it is wise to agree to binding arbitration at the time of signing a purchase contract.

DEAR BOB: I am a widow, 74, who plans to move to an assisted-living center in a few months. I want to give my house to my daughter and her husband, who would live in it. They have been kind to me during several recent illnesses. My free-and-clear house is worth about $575,000. However, a friend says I will owe a huge gift tax. The primary reason I want to give the house away now is my son, a lawyer, has not been nice to me and I don't want him to inherit anything after I die. I have sufficient income so I don't need to sell the house. Will I owe a large gift tax? -- Elsa W.

DEAR ELSA: Unless you have made total nonexempt lifetime gifts exceeding $1 million, you won't owe any gift tax. However, you must file an IRS gift tax return when you deed the house to your daughter and son-in-law. After you die , your $575,000 lifetime real estate gift will be subtracted from your federal estate tax exemption -- $2 million if you die in 2006. Consult a tax adviser for details.

DEAR BOB: Can I get a senior citizen reverse mortgage although I have a mortgage balance of about $120,000? My house is worth about $800,000 but will probably be worth $1 million by the time I need the reverse mortgage funds. -- Karen T.

DEAR KAREN: Presuming all owners of your principal residence are at least 62, you can obtain a reverse mortgage now. However, because a reverse mortgage must be recorded as a first mortgage, $120,000 of the proceeds will be used to pay off your existing first mortgage. The balance of your reverse mortgage commitment can be used for lifetime monthly income; a credit line, except in Texas; or lump-sum advances when needed.

DEAR BOB: The title to my home is held in my living trust. If I name a living trust beneficiary who is not a relative, what are the tax implications for the beneficiary after they inherit my home and after they sell it? Are the taxes the same as for a relative? -- Ms. B.W.

DEAR MS. B.W.: Unless the home is in one of the few states with an inheritance tax, the tax implications for a nonrelative inheriting your home are no different than for a relative.

If your total estate is less than the current $2 million federal estate tax exemption, no federal estate tax should be due after your death. Your living trust beneficiary will receive a new "stepped-up basis" of market value on the date of your death so only the capital gain exceeding that valuation will be taxed when he sells the house.

CONTINUED     1              >

© 2006 The Washington Post Company