Say Goodbye to PMI

The fact that the furnace is rusted is irrelevant if it worked on the day you bought that second policy. Home-warranty companies are notorious for refusing to pay for replacements by saying it is a "pre-existing condition."

I suggest you send a written demand to the second insurer (if your policy includes coverage for the furnace) demanding the company replace the furnace within 10 days. But don't threaten, because that's extortion.

If the company doesn't replace the furnace within 10 days, then it's up to you to replace it and later sue the second insurer in local small-claims court, presuming the furnace costs less than the court's maximum amount.

DEAR BOB: We bought our third and current home in 1987. I understand the present law about the $500,000 principal-residence-sale tax exemption for a married couple selling their home. However, my question is about our two previous home sales. I thought I read somewhere that because of the new tax law, I didn't need to keep records from our previous two homes, so I destroyed them. Do they pertain to the basis for our current home? -- Roger S.

DEAR ROGER: You should always save all records from previous home-sale transactions. Under the previous tax law (Internal Revenue Code 1034, which was replaced in 1997 by Internal Revenue Code 121), you "rolled over" your capital gain tax by purchasing a replacement principal residence of equal or greater cost.

The adjusted cost basis of your third home is not its purchase price. It is your purchase price, minus the deferred gains on the sales of your two previous homes, plus any capital improvements you added during ownership.

If the capital gain on the sale of your current home will exceed $500,000, I suggest consulting a tax adviser now to reconstruct your deferred gain to establish your adjusted cost basis. However, if your gain (including the deferred gain) is less than $500,000, then you won't have any principal-residence-sale tax to worry about. Of course, this presumes you and your wife both meet the 24-out-of-last-60-month occupancy test.

DEAR BOB: We bought our house in May. Before we bought, a professional home inspector noted a crack in our block wall, but he didn't mention anything about the foundation or the slope. After we moved in, we realized the house slopes five inches from the front door to the back door. Now we understand the foundation is actively sinking in the back. A structural engineer we hired before the purchase said whatever happened to the foundation was done and there was nothing to worry about. Now we are facing $30,000 in repairs. The engineer admits he was wrong. But he blames the real estate agent who showed him only one part of the house. The agent says to blame the engineer. Do we have recourse with anyone to help pay for this? -- Kelvin G.

DEAR KELVIN: Congratulations on doing your best to have the house thoroughly inspected before purchase. The most guilty suspect looks like the structural engineer. I hope you kept his written report to prove he said there was nothing to worry about.

The professional home inspector noted the crack in the block wall. Perhaps the slope wasn't noticeable. I suggest you consult a local real estate lawyer about suing the structural engineer for professional negligence. Chances are he carries errors and omissions insurance so the loss won't come directly out of his pocket.

DEARBOB: I have a question about two vacant lots adjoining my house. Where can I find information on selling one lot tax-free? My accountant and lawyer can't seem to find this tax law. -- Robert R.

DEAR ROBERT: If you sell a vacant lot within 24 months before or after the sale of your adjoining principal residence, then you can include the lot's capital gain along with the home sale as if it were one sale.