Settling Probate

By Robert J. Bruss
Saturday, December 16, 2006

Q: DEAR BOB: My mother died in 1988 and dad passed away this year. The house was, and still is, in my late mother's name. All dad did after mom's passing was continue to pay the property taxes on the house. A couple of children belong to dad only from a prior marriage. What needs to be done legally to clear the title to the house?

-- Mr. A.M.

A: DEAR MR. A.M.: What a mess! If your mother's estate was never probated or distributed to her heirs, her will needs to be probated in the local probate court where she was a resident at the time of her death. That will determine if your late father received title to the house or if her will left it to somebody else.

If mom didn't leave a written will distributing her assets, then her estate will pass according to the state law of intestate succession where she was a resident.

Presuming your late father received the house from your late mother, then another probate needs to be opened to distribute his assets according to his will or by the state law of intestate succession. For details, please consult a probate lawyer in the county where your mom was a resident.

DEAR BOB: I own a piece of commercial property that has a small mortgage. Can I sell this property without the buyer coming up with a big down payment to pay off the existing mortgage?

-- Jerre V.

DEAR JERRE: Yes. You can sell any property "subject to" its existing mortgage. Of course, the buyer must make the monthly payments or lose the property to foreclosure.

But the lender might enforce the mortgage's due-on-sale clause, if there is one. However, only very dumb lenders enforce due-on-sale clauses if the monthly payments are made on time. If that should happen, your buyer can refinance the mortgage with another lender to pay off the existing mortgage.

You should be aware that because the mortgage was acquired in your name, you will remain liable for it. If your buyer fails to keep up the monthly payments, that will reflect adversely on your credit report but not on the buyer's credit report.

DEAR BOB: My neighbors have anywhere from seven to 13 cars parked in front of their house. They run a gardening business with day laborers, a day-care business and a rooming house from the home. The neighborhood has single-family houses of four to six bedrooms in the $750,000 range. The constant traffic and noise, as well as strangers on our block, drives us crazy. Can anything be done to return peace and tranquility to the neighborhood? -- Edwin T.

DEAR EDWIN: Presumably you already had a polite conversation with the neighbor but it didn't produce satisfactory results. Next, I suggest you contact the city code enforcement officer to have the situation investigated to determine whether zoning and other laws are being violated.

If that doesn't produce satisfactory results, then you and your neighbors should consider bringing a lawsuit against the neighbor to abate this private nuisance that is disturbing the neighborhood.

DEAR BOB: My wife and I own a property that contains two rental houses on one lot. To sell the property and avoid capital gains tax, can we occupy one of the houses and still rent out the other one? Or must we occupy and/or not rent both for two years? -- Jon H.

DEAR JON: You and your wife could occupy one of the rental units as your principal residence at least 24 of the last 60 months before selling the property. Then you will avoid capital gains tax apportioned to that unit, up to $500,000 for a married couple filing a joint tax return. If you were single, Internal Revenue Code 121 provides a principal-residence-sale tax exemption up to $250,000.

However, your capital gains tax apportioned to the other rental house will remain taxable. Keeping the other unit vacant won't reduce your capital gains tax on its sale. For more details, please consult a tax adviser.

DEAR BOB: I will soon be buying out my investor co-owner in an apartment building for about $260,000. We are not relatives. We obtained title insurance when we bought the property about six years ago. Do I need title insurance again? -- Herb W.

DEAR HERB: Yes. Always get an owner's title insurance policy when acquiring any property and especially when buying out a co-owner. That's the only way you can be certain you are obtaining marketable title.

There is a possibility your co-owner has unpaid liens -- judgment, income tax, child support or other liens -- that may have attached to the property. Go back to the company that originally insured your title and ask if they have a discounted or "bring down" rate for your situation.

DEAR BOB: The buyer of our home made a quick Internet mortgage application and was declined. I offered to carry back the mortgage for the buyer on exactly the terms stated in the sales contract financing contingency clause. But the buyer refuses and wants to cancel the sale. Am I obligated to refund the buyer's good-faith deposit? -- Mary Ann P.

DEAR MARY ANN: The buyer is obligated to use good faith to remove the contingency clauses in the purchase contract. Applying with just one mortgage lender is clearly insufficient and does not show good faith.

Your offer to carry back the mortgage for the buyer shows financing is available.

However, if the buyer wants to get out of the sale, you might not want to do business with that person. Buyers like that are disgusting.

If I were in your situation, I would have my lawyer write a letter to the buyer giving him the opportunity to clear his breach of contract by either accepting your finance offer or obtaining a mortgage elsewhere.

If he refuses to complete the purchase as agreed in the sales contract, I would keep his deposit (presuming it is several thousand dollars). Let him sue you for it if he thinks the judge might rule in his favor. The buyer will look silly suing for a deposit refund when the buyer is in breach of the contract. For details, please consult a real estate lawyer.

DEAR BOB: Last weekend I was looking at condominiums for possible purchase. Several of the sales agents informed me when the condo complex has no-pet rules. Are such rules legal? It seems to me a condo owner should be allowed to keep an indoor cat if it doesn't go outdoors and never bothers anyone. -- Victoria G.

DEAR VICTORIA: Many upscale condominium complex CC&Rs (covenants, conditions and restrictions) prohibit pets. Such restrictions have repeatedly been upheld by the courts, so don't even think about having a pet in a no-pet complex. But perhaps you might get away with a goldfish.

DEAR BOB: My wife is from Trinidad and Tobago, West Indies. We intend to buy a home in Tobago. I am hoping we can get a mortgage in the United States. Is that possible for foreign real estate? -- Mark L.

DEAR MARK: Sorry, you cannot get a home mortgage in the United States for use in a foreign country. Perhaps your banker can refer you to an affiliate or correspondent bank in Tobago for assistance with financing there.

DEAR BOB: My husband and I have been married 27 years. He is rather "old school" and set in his ways. When we purchased our house about six months after getting married, he insisted title be taken in his name alone. I went along with that. We have had a good marriage, raising three wonderful sons, but my husband's health is declining. I am concerned what will happen if he dies first. He refuses to show me his will. When I bring up the subject of what happens to the house when he dies, he says, "Don't worry. It will go to you." How can I be sure I am named in his will to receive the house? -- Ida C.

DEAR IDA: There is no way to be certain you are named in your husband's will to receive the house. He might leave you, for example, only a life estate with the remainder to go to the three sons after you die.

Of course, because of the long period of your marriage, under the laws of most states you have probably established marital rights in the house. Other than that, you can't be 100 percent certain of receiving title to the house when your husband passes on.

DEAR BOB: I have heard mostly negatives about allowing a real estate listing agent to hold one or more open houses of a home listed for sale. These negatives include: (a) real estate agents use open houses to get more clients, and (b) inviting the public into the house invites the possibility of theft. What is your opinion? -- Bill S.

DEAR BILL: It is true, statistically, that real estate agent open houses rarely sell the house being held open. However, with today's home buyers taking more time than ever to decide on purchases, do you have a better idea to give a home exposure to the marketplace?

Of course, I presume the listing agent uses customary marketing methods such as Web sites, newspaper ads and the powerful multiple listing service.

Personally, as an investor I have bought several houses I spotted at open houses. Also, buyer's agents often drive their clients around on Saturdays and Sundays showing them what is available.

Of course, home sellers should remove their valuables from the premises before an open house. If the home has valuable antiques or artwork, that residence is not a good candidate for an open house.

DEAR BOB: What is a customary deposit for a home purchase? There will be 90 days between our offer and the closing on a house worth about $280,000. -- Lee S.

DEAR LEE: There is no right or wrong answer. As a buyer, you want to make a large enough good-faith deposit to convince the seller you are a serious buyer, but you don't want to tie up more cash in the deposit than necessary.

There is no "customary deposit." Real estate agents try to get as large a deposit as possible. The theory is the larger the deposit, the lower the probability the buyer will try to cancel the purchase.

Personally, I've bought property with as low as a $100 deposit (suggested by the listing agent, by the way). Looking back, I am surprised the seller accepted my offer with such a low deposit.

At the least, $1,000 is a good start for a deposit, especially in a slow buyer's market where the seller will be thrilled to receive any purchase offer. Of course, in a competitive seller's market a higher deposit of $5,000, $10,000 or more might be necessary to convince the seller to accept your offer.

A good procedure is to make a modest deposit, but agree in the sales contract to increase it to 5 percent of the sales price upon release of the contingencies, such as the mortgage lender's appraisal and the buyer's approval of a professional inspection report.

DEAR BOB: I recently sold my house for $375,000 and paid off the $28,000 mortgage balance. The rest was mine. How much tax should I expect to pay on my profit? I originally paid $195,000 for the house and sold it after six years.

-- Gloria G.

DEAR GLORIA: The mortgage balance is irrelevant. If you owned and occupied the house as your principal residence at least 24 of the last 60 months before its sale, Internal Revenue Code 121 provides up to $250,000 tax-free profits (up to $500,000 for a qualified married couple filing a joint tax return in the year of home sale).

The $375,000 adjusted sales price, minus your $195,000 adjusted cost basis, is $180,000. That profit is well below the IRC 121 tax exemption, so it appears you will owe no capital gains tax.

DEAR BOB: Can a home builder force us to buy the home? We have reached our boiling point with our builder. The mortgage monthly payments are too high, and we decided not to purchase the home. -- Chandra K.

DEAR CHANDRA: Of course, you can't be "forced" to buy a house you don't want.

However, if you signed a valid purchase contract that was accepted by the home builder, you can be held liable to the builder for monetary damages due to your breach of contract.

Surely, before you signed a purchase contract with the builder you knew what your monthly mortgage payments would be.

If you got cold feet while waiting for your new home to be completed and changed your mind about the purchase, you can be held liable to the builder for damages due to your cancellation of the purchase contract. Before defaulting, I suggest you consult a real estate lawyer to discuss your choices.

DEAR BOB: How do I know if my deed was recorded? Doesn't that get taken care of after signing the closing papers? I bought my condominium on Sept. 28, 2005. But I haven't received any proof that I own it. Shouldn't I have received the deed or something in the mail showing my deed was recorded?

-- Gay N.

DEAR GAY: The procedures vary by locality. In most states, the local recorder of deeds now makes a digital record of the deed as it is recorded. Then the original is usually mailed to the owner or to the mortgage lender whose name and address appear on the deed.

My experience has been that this can take several weeks or even months, depending on how busy the recorder of deeds is. But you should have received proof of the recording long ago.

If you ordered an owner's title insurance policy at the time of purchase, as you should have, then you would have received that title policy, which shows you now own the condominium. In addition, you should have a copy of the closing settlement papers.

I suggest you contact the firm that handled your title transfer. Maybe it has the deed from the recorder's office.

However, in "title theory" states, the mortgage lender often holds the deed until the mortgage or deed of trust obligation is paid in full. But it won't hurt to follow up now to learn where your deed is and to be sure it was properly recorded.

DEAR BOB: I have lived in my house 27 years and never thought a co-joined driveway was detrimental, but this all came to an end when a new owner moved in next door. He immediately converted his garage to a live-in unit and rented it out. Then he installed a swimming pool. Now he invites 25 guests at a time when the weather is good. They fill his driveway to capacity and spill out into the street. He rents out other bedrooms. Now the house has no garage. There are always four or more cars parked in our co-joined driveway. Is this detrimental to my home's value? -- Colin W.

DEAR COLIN: I am not sure what you mean by "co-joined driveways." If you own half of the shared driveway, and the neighbor owns the other half, with the lot boundary line down the middle, what would stop you from erecting a chain link fence down the middle of the wide driveway?

Of course, before doing that, be sure to check your title to be certain you and the neighbor don't have mutual easements to use each other's half of the driveway.

Have you had a polite conversation with the new neighbor to discuss your concerns? Maybe he is not aware of the problems he is creating for you. In the conversation, don't threaten but just point out the problems all the cars parked in the driveway are causing.

Before you take any action, such as contacting the city about the conversion of the garage to a residential unit without a building permit or erecting a fence down the middle of the shared driveway along the lot boundary, please consult a real estate lawyer to determine your rights.

DEAR BOB: What would be the process to trade two homes for one? The two homes are valued at $1.5 million total. The home for sale is valued at $1.2 million. The seller will trade. What is the first step to take? -- Phyllis S.

DEAR PHYLLIS: If I understand your question correctly, you want to trade two rental houses worth a total of $1.5 million for one rental house worth $1.2 million. That would be a partially taxable trade down because the two rental houses are worth $300,000 more than the one rental house being acquired.

This could get a bit complicated because there is the 25 percent depreciation recapture tax to consider in such a down trade.

If the owner of the $1.2 million rental house is willing to take your two rental houses and pay you the $300,000 cash difference, that would be the easiest way to go.

However, if he is not willing to pay you $300,000 cash, you should then consider selling the two rental houses in a Starker delayed tax-deferred exchange using Internal Revenue Code 1031(a)(3).

That means you sell your two rental houses for cash, have the sales proceeds held by a qualified third-party intermediary accommodator beyond your constructive receipt, and then within 45 days after the first sale closes designate the property to be acquired. You then have up to 180 days to complete the acquisition.

After the purchase is completed, then you will receive the $300,000 cash "boot," which is taxable to you. For details, please consult a tax adviser experienced with IRC 1031 tax-deferred exchanges.

DEAR BOB: I have owned a rental property for a year. If I sell it in the next few months, what is the capital gains tax I will pay? I read an answer you gave someone that the government wants a 25 percent tax back on the depreciation. Does that mean the government gets a total tax of 40 percent? -- Steve B.

DEAR STEVE: No. If you owned your rental property at least 365 days, you qualify for the federal long-term capital gains tax rate, which is a maximum of 15 percent.

However, a portion of your capital gain that is due to the depreciation you have deducted will be "recaptured" (that means taxed) at the special federal depreciation recapture tax rate of 25 percent (instead of 15 percent tax on the balance of your capital gain).

In addition, don't forget the state tax, unless the property is in one of the lucky states without income tax. For full details, please consult a tax adviser.

DEAR BOB: I understand the rule for stepped-up basis to market value on the date of death for inherited property. Does that same rule apply to my house that is held in my living trust? -- Andrew G.

DEAR ANDREW: Yes. Holding title to your house and other major assets in your revocable living trust does not deprive your heirs of the benefits of stepped-up basis on inherited property. They will thank you for leaving your assets to them via your living trust, thereby avoiding probate court costs and delays.

But they will still get the same stepped-up basis to market value on the date of your death as if your property went through probate.

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