Say Goodbye to PMI

DEAR RENEE: If you buy a bad house or a bad condo for 100 percent cash, you might not be able to sell that property except to another all-cash buyer. However, if you buy for a down payment of 20 to 25 percent cash and obtain an 80 or 75 percent mortgage, you won't have a large amount of cash tied up in one property.

Of course, if you are independently wealthy and you will never need to see the cash you pay again, be my guest and take the risk of tying up that cash in a bad property.

DEAR BOB: I own a house with a rental unit. I am selling this property and buying another house with a rental unit. Does the rental-unit sale qualify for a tax-deferred exchange? -- Ellen F.

DEAR ELLEN: Yes. Sale of the rental unit can qualify for an Internal Revenue Code 1031 tax-deferred exchange if you meet the requirements. They are trading equal or up in price and equity, not having "constructive receipt" of the sales proceeds, having them held by a qualified third-party intermediary beyond your control, designating the replacement property within 45 days after the sale, and completing the acquisition within 180 days.

If you own and occupy the house as your principal residence, its sale can qualify for an Internal Revenue Code 121 tax exemption up to $250,000 for a single home seller 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 the sale. For details, consult a tax adviser.

DEAR BOB: Roots from five trees on my neighbor's property have damaged a wall bordering our house. He refuses to remove the trees or repair the wall. A lawsuit will likely be in my favor so I can repair the wall. Can he refuse entry on his property to remove the tree roots and the trees? What recourse do I have? -- William D.

DEAR WILLIAM: Unless you have a court order, the neighbor can refuse to allow you to enter his land to cut the tree roots that are damaging the fence. If you file a lawsuit, be sure to ask the judge for a court order allowing you or workers you have hired to enter the neighbor's property to cut the tree roots that are damaging the fence. For details, consult a local real estate lawyer.

DEAR BOB: After a mortgage lender has given a loan payoff amount and cleared the title, is the lender allowed to come back months later and ask for more money, saying it made a mistake? -- Pam N.

DEAR PAM: I presume this happened to you. I would refuse to pay. The lender can beg you for the money. But the lender's only legal recourse is to sue the borrower, claiming a mistake. That would be a very weak lawsuit.

I've had this happen to me over amounts of less than $1,000. I just ignored the lender's requests. After one or two letters, which I ignored, the lender went away. If your mortgage was marked "paid in full" and the lender recorded a mortgage satisfaction or a deed of reconveyance, the lender has no further security.

Lenders should live with their payoff demands, which should be correct. For details,consult a local real estate lawyer.

DEAR BOB: My son and I bought a condominium in May 2003, close to the university, so he can live there during the school year. He graduated in 2006. We hold title as joint tenants. I live in a different location. We plan to sell the condo, which has about $80,000 equity. Will we owe any capital gains tax? He is now a student in law school. -- Celia B.

DEAR CELIA: Congratulations on making a smart investment with your son while he attended college. Because your son's name was on the title, if he owned and occupied the condo as his principal residence at least 24 of the last 60 months before its sale, up to $250,000 of the capital gains profit will be tax-free, thanks to Internal Revenue Code 121.

The amount of equity is irrelevant. What counts is the net profit. That is the difference between the condo's adjusted cost basis and the adjusted (net) sales price. If this sales profit is less than $250,000, no capital gains tax will be due. For details, consult a tax adviser.

DEAR BOB: My mother signed a deed conveying her home to my brothers and me for $10. Then we conveyed a life estate in the home to her for $1. She recently moved to an assisted-living residence and we sold the house. What is our cost basis? Is it the $10 we paid? Do we qualify for any capital gains tax exclusion? I called the IRS representative who said this is so complicated we should talk to a tax accountant. Is our cost basis the price my mother and father paid in 1953, plus any money they put into remodeling it? -- Tom S.

DEAR TOM: Because you and your brothers received the property as a gift, your cost basis is the same as your mother's basis. Presuming your father died before the gift, she received a partial stepped-up basis to market value on the date of his death. (If the house is in a community property state, it was probably a 100 percent stepped-up basis to market value.)

In other words, your basis is the same as her basis, including any capital improvements she added.But your capital gain above her basis is fully taxable because you don't qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000, as you didn't live in the house as your primary home at least 24 of the last 60 months before its sale.

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.

© 2007, Inman News Service