Say Goodbye to PMI

By Robert J. Bruss
Saturday, February 3, 2007

Q: DEAR BOB: Thank you for the article on your Web site about getting rid of private mortgage insurance. Upon my request, my mortgage lender sent me the paperwork to cancel my PMI payments of $72.56 per month. I have owned my home about eight years. I am concerned the lender's appraisal will cause my property taxes to go up. Should I leave everything alone and continue paying PMI? -- Geri S.

A: DEAR GERI: You are worrying about nothing. A mortgage lender's professional appraisal of your home has absolutely nothing to do with your property tax assessment. Go ahead and get your home appraised by the lender's appraiser.

Only the local tax assessor -- not a licensed appraiser hired by your mortgage lender -- can reassess your property. If you have been paying PMI on your mortgage for eight years, you probably have at least the required 20 percent equity to get rid of that expensive premium.

DEAR BOB: Our father passed away without a will. Among his assets, he left 18.56 acres in his name free and clear. My brother and I agreed that I should buy him out. With whom do I speak to get this done? -- Jeanna F.

DEAR JEANNA: To transfer title to a property when there was no will left by the deceased owner, the estate must be probated by the probate court where your father was a resident.T

he agreement with your brother is irrelevant. Only the probate judge can order the 18.56 acres and other assets distributed according to the state law of intestate succession. For details, consult a local probate lawyer.

DEAR BOB: I know you recommend home buyers have their own buyer's agents, but when buying a brand-new house in a new subdivision that has model homes and a sales staff, should the buyer still have a buyer's agent? My father said he typically just deals directly with their sales staff. I presume the on-site salespeople get the full 6 percent commission and if I have a buyer's agent, the commission would be split. Is this correct? -- Dave D.

DEAR DAVE: No. Some home builders refuse to cooperate with a buyer's agent. But in today's buyer's market for homes in most cities, smart home builders are thrilled to pay buyer's agents a sales commission, which is typically 2 or 3 percent of the sales price.

You definitely need a buyer's agent when buying a brand-new house. A savvy buyer's agent can advise you on the pros and cons of a subdivision and the specific homes, including the builder's reputation. That's something you won't hear from the builder's salespeople.

DEAR BOB: My husband and I bought our first home 16 months ago. Our furnace just went out. We purchased a 12-month warranty, and it expired. Then we bought the same insurance for all our major appliances from a different company. But this insurance company refuses to help us because they say the furnace is rusted and has been "meddled with." Should the professional home inspector we hired at the time of purchase have told us the furnace was rusted? Should I inquire about why our inspector didn't tell us the furnace was in disrepair and rusted? Or should we forget it and try to come up with the cost of a new furnace? -- Susan P.

DEAR SUSAN: A professional home inspector usually checks a furnace for obvious problems. If the furnace operated well for 16 months, you can't say the inspector didn't do his job.

Although the 12-month home warranty expired and doesn't apply, perhaps that major appliance policy you later purchased includes the furnace if specifically mentioned. That second company wouldn't have sent an inspector unless there is possible coverage.

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.

When your total principal-residence-sale capital gain is below $250,000 ($500,000 for a qualified married couple filing a joint tax return), and you meet the other Internal Revenue Code 121 ownership and occupancy tests, then your lot-sale profit won't be taxable. However, this provision applies only to one adjoining lot sale, not two. For details, consult a tax adviser.

DEAR BOB: My wife and I bought our first home in 1974 and have moved up several times, deferring our profit taxes under the then-current tax law. In 1995 we bought our present home. We have kept careful track of our basis in the property dating back to our first home. Under the current tax law, does this matter? When we sell our residence, can we simply take the $500,000 principal-residence-sale tax exemption based on our purchase price of that residence?-- Ira C.

DEAR IRA: Congratulations on keeping excellent tax records. The now-repealed Internal Revenue Code 1034 "rollover residence replacement rule" applies to all your deferred capital gains from your prior principal-residence sales.

The easy way to estimate your capital gain on the sale of your current principal residence is to add up your deferred capital gain from the previous sales and then subtract that number from your current home's purchase price.

Let's suppose those deferred home-sale "rollover" gains were $20,000, $45,000 and $70,000, for a total of $135,000. Just subtract $135,000 in this example from the purchase price of the home purchased in 1995.

Suppose you paid $300,000 for your present home. Subtracting your $135,000 deferred gains from previous home sales in this example produces a $165,000 adjusted cost basis for your current home (although you paid $300,000 for it). To that number, add the cost of any capital improvements you made during ownership.

If the difference between your adjusted cost basis ($165,000 in this example) and your adjusted (net) sales price exceeds $500,000 for a married couple filing a joint tax return, who owned and occupied their primary residence at least 24 of the last 60 months before the home sale, then you will owe capital gains tax. If the number is less than $500,000 (below $250,000 for a single home seller), then you won't owe any capital gains tax.

DEAR BOB: When I sell my house, can I reinvest in two different properties to avoid the capital gains tax? Or does it have to be just one property? -- Candice T.

DEAR CANDICE: Neither! When you sell your principal residence, if you owned and occupied it at least 24 of the last 60 months before its sale, Internal Revenue Code 121 gives you a tax exemption up to $250,000 (up to $500,000 for a married couple).

DEAR BOB: I am in the process of selling a rental house I own. I would like to purchase another property to avoid the capital gains tax of about $70,000. Can I buy into a rental property owned by my daughter and son-in-law? They want to sell me half of that property. -- Richard F.

DEAR RICHARD: No. All properties in an Internal Revenue Code 1031 tax-deferred exchange must be held in exactly the same names. Please consult a tax adviser for details.

DEAR BOB: What is your reasoning for not paying all cash for a property if the buyer has the funds and wants to cut down on monthly expenses? -- Renee DeC.

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