It's All in the Clause

DEAR BOB: My husband and I own a townhouse that we bought as an investment. Now we are considering selling it. If we agree to owner financing and retain title until the loan is paid, can the buyers deduct the mortgage interest and property taxes on their income tax returns? -- Melana W.

DEAR MELANA: Yes. The situation you describe is called a land contract sale, contract for deed, contract of sale, agreement of sale, installment land sale and a zillion other names.

The basic idea is the seller retains the legal title until the buyer makes all or an agreed number of payments to the seller. If there is an existing mortgage, the seller uses part of the buyer's payments to keep payments current on that mortgage.

As the seller, you remain the legal owner. The buyer becomes the equitable owner, entitled to the income tax deductions.

Your big benefit is you can report the sale to the Internal Revenue Service as an installment sale, paying capital gains tax on your profit over the years you receive principal payments from the buyer. You also get to pay ordinary income tax on your interest income received.

However, I do not recommend this type of sale for either real estate buyers or sellers. The potential problem for buyers is that the seller often is unable to deliver marketable title after the buyer faithfully made all the agreed payments to the seller.

The potential problem for land contract sellers, in many states, is the difficulty of getting a defaulting buyer out of the property if the buyer claims an equitable interest in it.

A better alternative is to transfer title to your buyer and carry back a mortgage or deed of trust secured by the property. Then, if your buyer defaults, you can foreclose.

DEAR BOB: Three of us jointly own a home; two want to sell. The third doesn't want to sell, which forces us to pay expensive monthly upkeep on the home. The property taxes have recently skyrocketed. What is the approximate legal fee to bring a partition lawsuit? -- Ken C.

DEAR KEN: Sorry, I have no clue how much a local real estate attorney will charge for a partition lawsuit, especially with a difficult co-owner. Try to negotiate a fixed fee, rather than an hourly fee, which might escalate if the other owner resists.

Shop around. Ask for recommendations from other local real estate investors for names of superb real estate lawyers. You will probably find a variety of fees quoted.

DEAR BOB: My husband and I each own homes from previous marriages. We each have two grown children and need information how to list these homes in our wills. We live in my home and have never added each other's names to our deeds. How do we handle this? -- Sharel B.