Don't Be Afraid to Use 'Bargaining Power'

DEAR BOB: We own a property bought in 1976, which has been rented since 1985 and is now fully depreciated. We want to do a Starker tax-deferred exchange to avoid profit tax. Can we exchange this investment property for an investment in a franchise? We have an opportunity to become an investor, with others, in a flourishing hamburger chain. Will this be tax-free? -- Gene S.

DEAR GENE: Acquisition of a franchise is personal property, so it is not eligible for a real estate Internal Revenue Code 1031 tax-deferred real estate exchange. That would be a fully taxable "unlike kind" trade of real property for personal property.

However, you could make an IRC 1031 tax-deferred trade of your investment property for another investment property of equal or greater cost, such as the real estate that is leased to the hamburger store. Consult a lawyer for details.

DEAR BOB: My grandmother sold her land to a friend and carried back the mortgage. After grandmother died, I inherited the promissory note and mortgage. Must I pay income tax on the interest I receive? -- David C.

DEAR DAVID: Yes. Interest income is taxable as ordinary income.

DEAR BOB: We just finished building a house on our lot and paid the builder cash. Do we need to obtain a deed to the house? The builder says we do not get a deed because we already have clear title to the land and the house is just an improvement to our lot. We have releases of liens from all the subcontractors. Our builder says it will cost us $2,000 to $3,000 to get a title clearance for a deed. Our custom home builder lives in the neighborhood and has been in business for several years, following in his father's footsteps. He enjoys a wonderful reputation. -- John and Mary H.

DEAR JOHN AND MARY: If you have an owner's title insurance policy for your land, that is the best assurance that you really own the property, including the new house built on it. If you don't have an owner's title policy, buy one from a title insurer. The fact that you received lien releases from the home builder, subcontractors and material suppliers is the best you can do to protect yourselves against mechanics' liens.

I hate to say, "Never trust a home builder," because I have known so many who are 100 percent honest. But there are also a few dishonest builders. Builders are notorious for filing bankruptcy to get out of paying debts. "Trust, but verify" should be your motto when doing business with contractors.

DEAR BOB: You often discuss "stepped-up basis" for a surviving spouse. When I married my husband almost two years ago, he already owned a house where we have been happily living ever since. He tells me his will leaves the house to me if he dies first. But he won't show me his will, so I am not sure. Should I insist he add my name to the title as "joint tenants with right of survivorship" just in case? -- Sarah T.

DEAR SARAH: Although I recommend both spouses have their names on the title to their residence, if your husband is reluctant to add your name to his title, you might not want to fight that battle.

Presuming his will leaves the house to you, upon his demise you would receive a new "stepped-up basis" to the house's market value on the date of his death. However, if you die first, he will not receive any stepped-up basis because he did not inherit any interest in the house from you.

Even if you are named in his current will to receive title to his house after his death, he can change that will at any time. Consult a lawyer for details.