By Robert J. Bruss
Saturday, September 2, 2006
Q DEAR BOB: I plan on paying cash for my next residence. Are there any hidden dangers in paying cash? -- Mark N.
A DEAR MARK: Please don't do that unless you are (1) very wealthy, (2) will be spending cash you never need to see again and (3) can afford to tie up a large amount of cash in one asset.
A better alternative is to pay a 20 percent or 25 percent cash down payment and obtain a fixed-rate 15- or 30-year mortgage for the balance of the purchase price. Then, just in case you have purchased a bad house or a bad condo, you won't have all your nest egg tied up. After a few years of owning and living in the home, if all turns out well, then you can pay off the mortgage. (Of course, be sure it doesn't have a prepayment penalty.)
I still recall a nightmare letter I received a few years ago from a retiree who bought her retirement condo for all cash. Only after moving in did she discover that the complex was badly managed and occupied by about 50 percent renters, who caused many problems.
When she tried to sell her condo, she discovered that mortgage lenders either refused to loan to new buyers or charged high interest rates because of the high risk with so many renters. The only way she could get her cash out was to sell to another all-cash sucker.
DEAR BOB: I own a house that I lived in for four years, until converting it to a rental last month. If I sell it within 24 months, will my cost basis be calculated on my original purchase price or on the property value when I converted it to a rental? -- Leonard H.
DEAR LEONARD: Market value on the date of conversion to rental status is irrelevant. Your adjusted cost basis for the house is your original purchase price, plus capital improvements you added during ownership. This is your basis for calculating your rental depreciation deductions.
Presuming you meet the 24-out-of-last-60-months primary-residence ownership and occupancy tests of Internal Revenue Code 121, you can rent the house up to 36 months after moving out before losing your $250,000 principal-residence-sale tax exemption. However, upon sale, the depreciation you deduct during the rental period will be taxed at the special 25 percent federal recapture tax rate. For details, consult a tax adviser.
DEAR BOB: About three years ago I bought a condo as my primary residence. I recently got married and want to make my wife a co-owner to make conveyance easier if something happens to me. Refinancing isn't an option because the interest rate would go up by about 2 percent. What do you recommend? -- Jerry T.
DEAR JERRY: You can sign and record a quitclaim deed to your new wife for a 50 percent interest in the property. If you want her to receive full ownership if you die first, holding title as joint tenants with right of survivorship (or as tenants by the entireties in states allowing that method for married couples) avoids probate upon a co-owner's death. If she dies first, then you become the sole owner again.
Better yet, a revocable living trust can specify that when you die she receives title to the condo. That way, just in case your marriage doesn't work out, you haven't given up control of the condo. But when you die she receives the title without probate. Also, there are additional living-trust benefits if you become incapacitated. Your wife should probably be named successor trustee to your living trust.
DEAR BOB: About 18 months ago, I purchased a tenancy in common with a partner. There are two houses on one lot. We recently converted them into two separate condos. I have been living in my house since the purchase. I plan to sell my condo house next spring, two years after we originally purchased. Does the $250,000 principal-residence-sale capital gains exemption of Internal Revenue Code 121 apply from the date the property was purchased or from the date it was converted into a condo? -- John M.
DEAR JOHN: Nobody knows the answer to your question for sure. Presuming you meet the 24-out-of-last-60-months primary-residence ownership and occupancy tests of IRC 121 by the time you sell, I would argue the 24 months began when you became a tenant in common and moved in.
Conversion to condominium ownership was to improve marketability and was a continuation of that ownership. Sorry, no rulings or other information are available on your situation.
DEAR BOB: My boyfriend and I got the mortgage for my house together. I put a $30,000 cash down payment on the house. The title is in my name only, but the mortgage is in both our names. Is he entitled to half of the house? -- Lupe B.
DEAR LUPE: I presume your boyfriend co-signed the mortgage because he has good income and great credit. Most mortgage lenders insist co-borrowers be on both the mortgage loan obligation and on the title. Your situation is quite unusual.
Based on your description, if your boyfriend's name is not on the title, he didn't make any down payment and he doesn't pay part of the mortgage, property taxes or home repairs, he appears to have no ownership interest in the house. For details, consult a local real estate lawyer.
DEAR BOB: Can a single home seller claim more than the $250,000 primary-residence-sale tax exemption by using the entire capital gain to buy another home for a higher price than the residence sold? -- Kevin C.
DEAR KEVIN: No. As a sole home seller, you are limited to the $250,000 principal-residence-sale tax exemption of Internal Revenue Code 121. That's presuming you owned and occupied your primary home at least 24 of the last 60 months before its sale.
Purchasing another home for greater cost won't increase your exemption.
DEAR BOB: My rental property is worth about $590,000 and has a $376,601 mortgage. If I sell, to avoid tax do I have to invest all my profit in another property or can I use a small amount to invest in a second property?
-- Tracy McG.
DEAR TRACY: To qualify for an Internal Revenue Code 1031 tax-deferred exchange, you must trade equal or up in both property value and equity. You can trade your one investment property for two or more rental or business properties if the totals equal or exceed what you receive for your current rental property.
The amount of the mortgages on the acquired properties must equal or exceed the old mortgage balance. If you keep any cash or net mortgage relief from the trade, that is taxable "boot" to you. Please work with a qualified third-party intermediary accommodator to be certain your transaction qualifies as a tax-deferred exchange.
DEAR BOB: I sold my principal residence on March 15, 2005, and took my $250,000 tax-free capital gain. I had lived there two of the previous five years. On Jan. 1, 2002, I moved in with my fiance, so we have now lived in his house together for 3 1/2 years. I was not on his deed, however, until we married a month ago. Can we sell this property (his residence for the past 10 years) and take a $500,000 tax-free capital gain? Does the clock start when I moved in or when I was on the deed? -- Linda F.
DEAR LINDA: You are in luck. If you meet the 24-out-of-last-60-months occupancy test (as you do) and you are married to the title holder at the time of the principal-residence sale, you and he can qualify for up to $500,000 tax-free principal-residence-sale profit if you file a joint tax return in the year of the home sale.
However, because you used your exemption on your March 15, 2005, home sale, and Internal Revenue Code 121 allows use of this tax break only once every 24 months, for you to qualify for the additional $250,000 exemption the sale must close after March 16. For details, please consult your tax adviser.
DEAR BOB: My wife and I divorced last year. Her name is still on the mortgage and she wants it taken off. She signed a quitclaim deed. I sent this to the mortgage company asking it to take her name off. I do not want to refinance because the mortgage has a good interest rate. The mortgage company refused to remove my ex-wife from the mortgage obligation. Is there any way to do this without refinancing or selling? -- Michael T.
DEAR MICHAEL: No. There is nothing your ex-wife can do to get her name off the mortgage obligation. If she had a good divorce lawyer, that lawyer would have insisted you refinance in your name alone so she could be free of that mortgage obligation on her credit reports.
Since that wasn't done as part of the divorce agreement, although your ex-wife's name is off the title after you recorded that quitclaim deed, her name remains on the mortgage until you refinance or sell. If you make the monthly payments on time, that will reflect well on her credit reports.
DEAR BOB: My grandmother died a few months ago. She owned a free-and-clear house. As part of her living trust, my two sisters, my dad, his three sisters and I are to sell the house and divide the profit evenly. What is the difference between a living trust and an inheritance? Are they taxed differently? -- Elizabeth C.
DEAR ELIZABETH: Be thankful your grandmother wisely held title to her house in her living trust. The result is that probate court costs and delays are avoided.
Because you and the others inherited the property, you are entitled to a new "stepped-up basis" to market value on the date of your grandmother's death. The fact she held title in her living trust is irrelevant. You still get the stepped-up basis. That means that if the house sells for the same market value, no capital gains tax will be due.
However, if your grandmother died this year and if her total net estate exceeds $2 million, an estate tax might be due before title to the house can be distributed to the heirs to sell. For details, consult your tax adviser.
DEAR BOB: You had a recent item about home seller carryback mortgages. One advantage you cited is that the seller can foreclose if the buyer defaults. But what about a buyer whose sellers carried back the mortgage and then died? How is the buyer protected? -- Kathy S.
DEAR KATHY: After the seller-lender dies, the home buyer continues making monthly mortgage payments to either the estate or to whoever inherited their assets.
When the mortgage is paid off, either the estate executor or the heirs will execute a Satisfaction of Mortgage or a Deed of Reconveyance to clear the loan obligation from the title. In other words, the death of the mortgage carryback seller-lender is not a big problem for the home buyer who obtained the seller financing benefits.
DEAR BOB: I have owned my condominium since March 31, 2005. I am interested in relocating in the next few months for career purposes. Someone told me I might be exempt from capital gains tax on the sale of my condo -- although I have not lived in it for 24 months -- if I sell for career or educational purposes. Is this true? -- Annmarie S.
DEAR ANNMARIE: If you sell your principal residence due to a job location change that qualifies for the moving expense tax deduction, you may be eligible for a partial Internal Revenue Code 121 $250,000 exemption based on the number of months of primary-residence ownership and occupancy.
However, moving for educational purposes clearly does not qualify unless you obtain a new job where you attend school.
DEAR BOB: We bought our home 18 years ago with the seller carrying back the mortgage. We faithfully made on-time payments every month. This December we will make our final mortgage payment. What do we need from the owner for final title clearance to the property?
-- Susan H.
DEAR SUSAN: Congratulations on making your final payment after 18 years of homeownership. Not many mortgages last that long because they usually get refinanced or the home is sold.
If a mortgage was recorded against your title, when you make the final payment your seller-lender should provide you with a Satisfaction of Mortgage in recordable form so you can clear your title of the mortgage security.
If the security instrument was a recorded deed of trust, the lender should instruct the trustee to provide a Deed of Reconveyance in recordable form, which you can record to clear the deed of trust from your title.
The seller-lender should also return your promissory note marked paid in full.
Because most individual lenders don't know what to do when the final payment is made, you may have to guide your seller-lender to take care of the details properly.
DEAR BOB: Can we fire our real estate agent? We (and four others) are in the process of selling our property to a commercial buyer. Our agent never shows up for meetings and is so out of the loop. He calls us to see what is going on with the sale. We don't think he deserves the 6 percent sales commission because his involvement ceased after finding the buyer. We want to fire him or, at the very least, cut his commission. Can we do that? -- Harrison Y.
DEAR HARRISON: No. If your real estate agent has a valid exclusive right to sell, exclusive agency or open listing and he is the "procuring cause" of the sale or found a "ready, willing and able" buyer but you owners took control after that, the agent is still entitled to the agreed 6 percent sales commission.
When the sale closes, if you refuse to pay the full sales commission, the listing agent can sue for any unpaid commission. Just because the agent doesn't attend meetings of the sellers is no reason to deny a sales commission for producing an acceptable buyer.
DEAR BOB: Can I use Internal Revenue Code 1031 dollars to buy a home to live in? It is a two-family house. What are the mechanics of tax deferral? -- Linda Jo E.
DEAR LINDA JO: If you own a rental property and want to avoid paying capital gain tax upon its sale, you can make an Internal Revenue Code 1031 tax-deferred exchange for only another investment or business property of equal or greater cost and equity.
If you use part or all of the sales proceeds to buy your personal residence and don't use the entire amount to acquire another qualifying "like kind" property, you will owe capital gains tax on that portion of your capital gains from the sale. For details, consult a tax adviser.
DEAR BOB: Three siblings are tenant-in-common co-owners of our family property. One sibling put in a large amount of personal money to improve the property and wants to keep it. The other two siblings don't want the property. She is negotiating to buy out the two-thirds shares. How should the buyer be compensated for her personal expenses for the improvements? Who pays to cure the problems found during the pest inspection and professional inspection of the whole house?
-- Mr. C.G.
DEAR MR. C.G.: Real estate co-owners are obligated to pay in proportion to their ownership shares for ordinary and necessary property expenses such as mortgage payments, property taxes and necessary repairs. That means all three co-owners are obligated to pay for the pest control repairs and the professional inspection.
If the property improvements made by one co-owner weren't necessary or agreed to by the other co-owners, that individual might not be entitled to reimbursement. However, if the improvements added to the property value, it is the right thing to do for the other two owners to pay their one-third shares. This can all be worked out in the sales agreement. For details, consult a local real estate lawyer.
Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page,http://www.bobbruss.com.
2006, Inman News Service
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