By Robert J. Bruss
Saturday, November 11, 2006
Q: DEAR BOB: We just refinanced our condo, receiving part of our equity in cash. Is the money we received taxable? -- Sheila D.
A: DEAR SHEILA: No. When you refinance your mortgage and take out all or part of your home equity in cash you owe no tax on the cash. Borrowed money must eventually be repaid, whether you do so over the life of the mortgage, such as 20 or 30 years, or when you sell the condo and pay off the mortgage balance in full.
If your new refinanced mortgage exceeds your home's adjusted cost basis (as it probably does), such as a $200,000 mortgage on a condo you bought for $150,000 several years ago, that is a "mortgage in excess of basis." There is no tax on such an "excess mortgage" at the time of refinancing. When you sell your condo, however, you have an excess mortgage when that $50,000 cash-out money becomes part of your resale profit, even though you already received that $50,000.
Of course, when you sell and if your principal residence capital gains sale profit is less than $250,000 under Internal Revenue Code 121 you owe no capital gains tax if you owned and occupied the home at least 24 of the last 60 months before its sale. That exemption includes any excess mortgage "cash out" amount.
DEAR BOB: Is there any defense for a partition lawsuit where one co-owner wants to force a property sale, but the other co-owner doesn't want to sell? -- Madison T.
DEAR MADISON: It is up to the trial court judge to grant or deny a real estate partition lawsuit where one co-owner seeks a forced sale of the property but the other co-owners don't want to sell. My experience has been 95 percent of all partition lawsuits are granted by the court to force the sale of the property, with the sale proceeds divided among the co-owners. Consult a lawyer for details.
DEAR BOB: I bought a vacant lot that was supposed to be 5,000 square feet, but the title insurance company didn't report an easement for about 1,600 square feet. As a result, I can't build the house I want unless the house size is reduced. Can I get payment from the title insurance company for my problems and losses? -- Sergio D.
DEAR SERGIO: If you bought an owner's title insurance policy, the title insurer must either pay to get the undisclosed recorded easement removed, or pay you the diminished market value of your property with the recorded easement, which the negligent title insurer failed to disclose to you.
Of course, if you didn't buy an owner's title insurance policy, even if you paid for a mortgage lender's title policy, you have no claim against the title insurer, though the mortgage lender has a valid claim under the lender's title policy.
If the easement was not properly recorded or obvious from a visual inspection, such as a power line easement, then it is not a valid easement and the title insurer has no liability. Consult a lawyer to determine your legal rights against the title insurer.
DEAR BOB: I am considering buying a property in my neighborhood that needs to be rehabilitated. The seller wants to sell for about $200,000, but I want to pay only about $100,000. I know the value after renovation will be more than $700,000. Can I ask the seller to add me to the title so I can obtain financing to pay the rehab costs, and then split the profits?
-- Lisa M.
DEAR LISA: If the owner agrees to add you to the title so you can obtain financing for renovations, you need to consult a real estate lawyer to prepare a joint venture or a partnership agreement.
Few owners would be willing to do that, as the legal complications could be endless, especially if you try to establish a low $100,000 basis. You would probably be better off acquiring the title and then obtaining an improvement loan to pay for the rehabilitation.
DEAR BOB: I would like to put my name on the title of the home I share with my mother. We are about to sell it and I want to know what I need to do to make that happen. I share in the upkeep and the payments. I was told having my name on the title is the best way to assure funds when the sale is completed. Is this true? -- Alicia H.
DEAR ALICIA: If your name was not on the title when you paid the mortgage interest and property tax payments, you are not entitled to claim any itemized tax deductions for those expenses. If your mother gives you a partial interest in her house, perhaps 50 percent, that makes you obligated for 50 percent of the capital gains tax. When you receive a property gift, you take over the donor's adjusted cost basis for that gift.
Even if the house has been your principal residence at least 24 of the last 60 months before its sale, you can't yet qualify for the $250,000 principal residence tax exemption of Internal Revenue Code 121. The reason is your name was not on the title at least 24 months before the home sale.
Your mother's gift to you of part of the house could be a major mistake for both of you. Before she gives you a quitclaim deed for any interest in her house, you should both consult your tax adviser to discuss all the details, especially the disadvantages.
DEAR BOB: A tree that belongs to my neighbor is next to our common wall, which is breaking up from the roots. The tree owner refuses to take any action. What can I do?
-- Steve W.
DEAR STEVE: By "common wall" I presume you mean a concrete wall, not just a wood fence. Legally, you can cut the tree roots back to the property line. However, be careful not to kill the neighbor's tree. If you do so, you can be held liable to the neighbor for the market value of the tree you killed.
Another approach would be to sue your neighbor for a private nuisance abatement. You could ask the local court for an order to force the neighbor to cut the tree roots back to the property boundary.
DEAR BOB: I own a property on which the maintenance is paid from escrow by my bank. They charged some type of "assessment" of an additional fee in September 2005. Neither my bank nor I was notified of the $190 original fee. Now they have imposed late charges and I received notice from a lawyer saying I must pay more than $1,600. They put a lien on my property title. Is it legal to notify me more than a year later?
-- Lourdes B.
DEAR LOURDES: Who are "they"? I have never heard of an escrow for "maintenance." The two most common types of mortgage escrows are for property tax and for homeowners insurance payments.
Consult a lawyer to review the escrow agreement. If the $190 charge was for some type of tax, such as a civic special assessment for street paving, the escrow holder should have been notified and should have paid the additional charge from your escrow account.
Perhaps your lender is trying to get you to pay the extra fees for the lender's negligence failing to pay a special assessment tax. Lenders do this all too frequently, hoping you won't notice the extra late charges because of the lender's negligence.
DEAR BOB: What is the best way to hold title to my residence to avoid probate and also to get the step-up in cost basis? -- Steve L.
DEAR STEVE: I presume you mean you want your heir to receive the stepped-up basis to market value after you die.
The best way to hold title to real estate is usually in a revocable living trust. While you are alive you can buy, sell, refinance and manage your living-trust assets because you are the trustor, trustee and beneficiary. However, if you become incapacitated, such as with Alzheimer's disease or a severe stroke, or after you die, your successor trustee takes over and manages or distributes your living-trust assets as instructed in your living trust.
After you die, your living-trust assets are distributed without probate costs or delays, according to your living-trust instructions. Your heirs then receive a new stepped-up basis to market value on the date of your death.
DEAR BOB: Can I avoid capital-gains tax on the sale of my property by forming a limited-liability company? -- Daniel J.
DEAR DANIEL: No. The purpose of holding real estate title in a limited-liability company is not to avoid capital gains tax. You use such a company to avoid personal liability if someone is injured on your property.
If the property is your principal residence, you can avoid capital gains tax upon sale by use of the Internal Revenue Code 121 tax exemption up to $250,000 for a single person, or up to $500,000 for a married couple filing a joint tax return. To qualify, you must have owned and occupied your principal residence at least 24 of the last 60 months before its sale.
If the property is held for investment or for use in your trade or business, the only way to avoid capital gains tax is to make an Internal Revenue Code 1031 tax-deferred exchange for another "like kind" property of equal or greater cost and equity. Consult a tax adviser for details.
DEAR BOB: How can I get my half of the rental security deposit returned? I moved out but my ex-roommate chose to continue renting past the one-year lease expiration. -- Douglas R.
DEAR DOUGLAS: Your ex-roommate, not the landlord, owes you the security deposit amount you originally paid when you signed the lease. Because he remains in the rental property, he is using your 50 percent share of the security deposit, plus his 50 percent. If he refuses to pay you the 50 percent to which you are entitled, take him to the local small-claims court to get a judgment for the security deposit he owes you.
DEAR BOB: Why did you recently say homeowners need insurance in case a tree falls on a neighbor's property? This happened to us and our insurer said we had no liability. The neighbor's insurance policy will have to pay for our tree's damage to their fence. -- Harold W.
DEAR HAROLD: You always need homeowners insurance. In addition to providing hazard insurance, a homeowners insurance policy includes negligence liability coverage. Liability for your tree that fell on the neighbor's property depends on the cause. If it was a windstorm, then you have no liability to your neighbor because you were not negligent.
However, if the tree was diseased or was leaning toward the neighbor's house when it fell and damaged the neighbor's property, you would be liable for negligence, and your homeowners insurer would pay for the damage. Ask your insurance agent for details.
DEAR BOB: How can a second residence qualify for the $250,000 single or $500,000 married capital-gains tax exemption, or the tax-deferred exchange benefit?
-- Patty C.
DEAR PATTY: To qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a married couple filing a joint tax return), you must own and occupy the home as your primary residence at least 24 of the last 60 months before its sale. To qualify for the Internal Revenue Code 1031 tax-deferred exchange benefits, the property must be a rental and must be traded for another "like kind" rental property of equal or greater cost and equity. Consult a tax adviser for details.
DEAR BOB: If I already have a revocable living trust, do I also need a will? -- Joe S.
DEAR JOE: Yes. You need a will because you probably have some assets that are not included in your revocable living trust, which includes your major assets such as your house, bank account, stocks and bonds. Your automobile, furniture and other personal assets probably are not held in your living trust. When you die, your will can specify whom you want to inherit real and personal assets not included in your living trust. For details, consult the lawyer who created your living trust.
DEAR BOB: I own a house where my elderly mother holds a life estate. She lives alone in the house and may someday opt for a smaller apartment. If this happens, and she refuses to release her life estate, do I have any legal recourse?
-- Patrick L.
DEAR PATRICK: Legally, you are what is called a remainderman, subject to your mother's life estate.
You should get a copy of the document that created her life estate. If it was well written, it should say that when your mother dies or moves out for longer than six months, her life estate terminates. If the life-estate document was poorly written, it is open-ended and gives your mother a life estate without stating what happens if she moves out for longer than six months.
Should that happen, you would probably have to bring a quiet title lawsuit to terminate her life estate. For more details, consult a local real estate lawyer.
DEAR BOB: Is there any way to leave my house to my three sons after my death other than through my will? I don't think I have enough assets to merit a living trust.
-- Aida S.
DEAR AIDA: If title to your house passes under the terms of your will and your will has to be probated in court, the legal fees, other costs and delays could be substantial. However, if you hold title to your house and other major assets in your living trust, probate costs and delays are avoided.
Unless you die and leave a net estate of more than $2 million in 2006 or 2007, there won't be any federal estate tax due. Depending on your state of residence, there probably will be little or no state inheritance tax because you are leaving your assets to your sons.
DEAR BOB: A large old tree in my neighbor's back yard is leaning toward my house. It shows signs of significant rot and cracking at the base of the trunk. If it falls toward my house, it would easily cause significant damage and pose a major hazard. Besides asking my neighbors to cut down the tree, do I have any recourse? -- Scott O.
DEAR SCOTT: You should consult your homeowners insurance agent, who can write a letter to the neighbor outlining the negligence if the tree is not removed or trimmed to reduce the hazard of its falling onto your house.
I recently had a similar situation at my home. I contacted our local code enforcement officer who notified my out-of-town neighbors about their two tall trees that were leaning toward my house. The absentee neighbors were nice and had their two trees removed within a few weeks.
Presuming you have already tried being nice to the neighbor without results, maybe it's time to become more aggressive. After you contact your insurance agent and the local code enforcement officer, you could sue the neighbor in a private nuisance abatement lawsuit. If the judge agrees the tree is a hazard, he could issue a court order to force the neighbor to abate the nuisance and remove the dangerous tree.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page,http://www.bobbruss.com.
© 2006, Inman News Service
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