'Funding' a Living Trust

By Robert J. Bruss
Saturday, June 16, 2007

Bruss is away. These questions are from previous columns.

Q: DEAR BOB: About two years ago, I set up a revocable living trust and included my checking, savings and stock brokerage accounts. I recently realized that the title to my condominium is not in my living trust. What must I do to place my condo into my living trust to avoid probate after I die? -- Larry T.

A: DEAR LARRY: You are not alone. Millions of homeowners create revocable living trusts to avoid probate costs and delays for their heirs but forget to "fund" them with title to their homes. This is especially important if you own real estate in more than one state; otherwise, probate will be required in each state.

The easiest way to transfer title to your condo into your living trust is to sign a notarized quitclaim deed in recordable form from yourself to yourself as trustee of your living trust. Then record it with the local recorder of deeds.

To be recordable, the quitclaim deed usually must include the legal description of your property, the local parcel number and your notarized signature. The easiest place to find your condo's legal description and parcel number is on your owner's title insurance policy.

DEAR BOB: We plan to sell our home, which has worn and stained carpet. Professional cleaning won't remove the stains. A friend suggested that we just clean the carpet as best we can and offer a credit to the buyers so they can select their own carpet color. I worry that this is not putting the best face on our house and that the carpet might turn off potential buyers. What do you suggest? -- Penny S.

DEAR PENNY: Discounts don't work. Spending a few hundred dollars or even a few thousand dollars on new carpet will pay off. Most home buyers would not be able to imagine how your home would look with new carpet.

You don't have to buy top-of-the-line new carpet, but don't install the cheapest carpet, either. Avoid what I call "cheap-spec-house dark brown" or any other color except light beige. Most important, install a good-quality pad, which makes the new carpet comfortable to walk on, to put your prospective buyers in a good mood.

DEAR BOB: I own a condominium unit that suffered water damage about six months ago from the upstairs condo after a pipe in the wall leaked. The homeowners association paid for extensive repairs to my bathroom. Do I have to disclose this to my buyer? -- Derek S.

DEAR DEREK: Unless the damage was not fully repaired or there is evidence of the need for additional repairs, you don't have to disclose what happened. If homeowners were required to disclose all past repairs, the list for most homes would be a mile long. All you must disclose are current defects and problems that have a material effect on the market value or desirability of your home.

DEAR BOB: I am in the process of buying a house. The seller accepted my purchase offer, but the sale won't close for 60 days because the seller needs extra time to move. However, that's good for me because it means I can shop for the best mortgage. The first lender, the bank I have done business with for at least 10 years, was arrogant. It insisted on a $250 appraisal fee, which I paid. The appraisal came in at the sales price. When I questioned the loan officer, he said appraisers are instructed never to estimate a market value higher than the sales price, though I know I got a bargain price below market value. Because I have plenty of time, I continued mortgage shopping and found a better deal with another lender, but the second lender refused to accept my copy of the first appraisal and insisted that I pay $300 for a second appraisal from a different appraiser. Is this legal? -- Beth W.

DEAR BETH: As you have discovered, mortgage lenders and not borrowers hire the appraisers. A second mortgage lender will rarely accept an appraisal ordered by the first mortgage lender because of nonsense professional appraisal rules. So you, the borrower, get stuck paying a second appraisal fee. However, if you found a much better mortgage, paying a $300 second appraisal fee is worthwhile.

DEAR BOB: We are selling our home. We interviewed three agents, as you suggest, and they each provided us with comparative market analyses. However, they used mostly different comparable recent home sales in our area. We have an average house in a desirable neighborhood. The agents set the market value of our home at $475,500, $560,000 and $625,000. These are all experienced local agents. How can they set the market value of our home so far apart? -- Joseph H.

DEAR JOSEPH: You should be aware that the agent doesn't set the market value for your home -- the local market does. Something is seriously wrong with those comps, especially if they didn't use the same recent sales. One of those agents may have tried to "buy" your listing by estimating a high market value, and another may have estimated a low market value, hoping to make a quick sale. Keep interviewing agents.

DEAR BOB: My house, which I want to sell, was rented to tenants from 2000 to 2004. I moved back 26 months ago. Can I still do a Starker tax-deferred exchange? If not, would there be any benefit to carry back the mortgage for my buyer? I am single, if that makes a difference. -- Lisa Z.

DEAR LISA: You don't qualify for an Internal Revenue Code 1031 tax-deferred exchange because the property is your personal residence, not a rental or business property. To make the property eligible for a tax-deferred exchange, you must move out and rent the property to a tenant. However, because your property is eligible for an Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 for a single homeowner, that might be your best choice.

If you carry back the mortgage for your buyer, that is called an installment sale. It will spread out the tax on your profit over the life of the mortgage payments you receive. The capital gains portion of each payment you receive will be taxed at the current federal 15 percent tax rate, plus applicable state tax. Of course, the interest income you receive is taxable as ordinary income. Consult a tax adviser for details.

DEAR BOB: My friend owns a condo and is paying $300 per month to the homeowners association, but the garden and maintenance of the building have not been kept up. I told her to call someone to audit the books. What should she do? -- Elaine F.

DEAR ELAINE: Don't jump to conclusions. Your friend should attend the monthly homeowners association board of directors meetings to ask why the garden and other maintenance is so poor. Maybe there is a good reason, such as high costs for unexpected roof repairs.

For example, I own a second-home condo where an old rock retaining wall recently collapsed. The unexpected replacement cost would be $26,000. Fortunately, our well-managed association has several times that amount in reserves, so a replacement wall can be built without affecting other, budgeted maintenance expenses.

Your friend should investigate first, then complain only if management seems out of line.

DEAR BOB: I bought my home 13 years ago. My neighbor's fence is on my property by about two feet. I allowed the original neighbor to leave the fence there. However, after a new neighbor bought about a year ago, I asked her to move the fence according to my survey. She has not. What recourse do I have? -- Julie H.

DEAR JULIE: From your description, it appears that the fence is on your property. Therefore, it is your fence. You can remove it if you wish, but you can't force the new neighbor to pay the cost of tearing down your fence and rebuilding it on the other side of the boundary.

DEAR BOB: About three years ago, my son wanted to buy a condominium. He was earning about $75,000 per year as a certified public accountant at a big firm. However, his credit score was horrible, about 600, because he failed to pay credit card bills on time when he was in college. So I agreed to take title and obtain the mortgage in my name. Since then, he has paid all the mortgage payments on time. I recently signed a quitclaim deed adding him as a joint tenant with right of survivorship. When he approached the mortgage company about transferring the loan to him so he can improve his FICO score, he was told that he would have to pay a 1 percent assumption fee, which would be about $3,600. He wants to do this so he can deduct the mortgage interest and property taxes on his income tax returns. Do you think he should do so? -- Dan F.

DEAR DAN: No. As a CPA, your son should know that he is entitled to deduct the itemized property tax and mortgage interest deductions he pays on his tax returns if his name is on the condo title. His name does not have to be on the mortgage obligation to claim the interest deduction.

DEAR BOB: When a tenant-buyer goes to a mortgage lender to get a loan to exercise a lease option, does the bank look at the option consideration money and the rent credit earned during the tenancy as part of the down payment? I am told that the loan-to-value ratio will be based on the option purchase price rather than the current fair market value. -- Joel D.

DEAR JOEL: Having been involved in many home lease-option purchases and sales, my experience has been that each mortgage lender treats lease options differently.

When a lease-option buyer obtains an adjustable-rate mortgage, I've found, the mortgage lenders are the most flexible, giving full down-payment credit for the buyer's option money and the rent credit earned during the tenancy period.

The buyer should consult at least a half-dozen mortgage lenders to obtain their specific mortgage terms for exercising a lease option. This is a situation in which I highly recommend consulting an experienced mortgage broker, who should know which lenders are the most flexible in such situations.

DEAR BOB: I plan to sell my home. Should I stay in my home while trying to sell it? We could move into our new home and leave the one we are trying to sell vacant. Which scenario will help sell our home faster? -- Dana P.

DEAR DANA: Your real estate agent is in the best position to advise you whether to stay or move during the sales process.

The answer depends on whether your home shows well with you and your furniture still in the house. Or maybe it will show better if you move out and spruce it up with fresh paint and perhaps new carpet.

As a buyer, I like vacant houses because then I can easily spot most defects. As a seller, I prefer to sell vacant houses after painting and cleaning them, usually installing new wall-to-wall carpet. Vacant rooms look bigger than rooms occupied with furniture.

DEAR BOB: To help us buy our first home, my wife's parents lent us $50,000. We have been faithfully repaying them monthly, including interest. They are retired, and they need the income. However, when we were audited by the IRS, our interest deduction for this loan was denied. The IRS agent said the interest is not deductible because the $50,000 loan is not secured by a mortgage on our home. Is this correct? -- Gerry T.

DEAR GERRY: Yes. For home mortgage interest to qualify as an itemized tax deduction, the loan must be secured by a mortgage on your property. To qualify for an interest deduction, you should give your wife's parents a mortgage or deed of trust to secure their promissory note. Then you can deduct the interest you pay each year to them.

DEAR BOB: I just sold my house. The buyer had it professionally inspected. All went well, but the buyer asked me to replace a couple of windows that have condensation, probably because of a bad seal. My home is 12 years old and in beautiful condition. I just put more than $20,000 into it with a new roof, siding, appliances and professional paint job throughout. I think the buyer is being unreasonable, asking me to fix the one and only thing wrong with my home. Am I being unreasonable in not wanting to pay for the windows? -- Joe McC.

DEAR JOE: If the buyer's purchase offer is acceptable, especially if the local home sales market is slow, why risk losing him over a few hundred, or even a few thousand, dollars?

Better than replacing those windows, however, is to offer your buyer a repair credit at the closing, such as $500 or $1,000. Chances are the buyer won't even replace those windows, but then you won't risk losing the sale over a petty item.

Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, http://www.bobbruss.com.

Copyright 2007, Inman News Service