Novice Investor at a Crossroads: Trade Up, Fix Up or Sell?

DEAR WESLEY: You will not be able to take the deduction because you don't meet the time frames.

PMI, which is required on many loans with a down payment of less than 20 percent, protects a lender if the borrower goes into default. For years, tax lawyers have argued that PMI is like mortgage interest and should be deductible for tax purposes. However, the IRS was opposed. Eventually, Congress stepped in and passed a law allowing homeowners to deduct these premiums.

But there's a catch. This deduction is allowed only for mortgages obtained in 2007.

You should, however, talk with your lender or lawyer about the law that allows homeowners to cancel private mortgage insurance when the equity reaches a certain level.

My wife and I own a lot in a retirement community, primarily as an investment. There is little chance that we will ever build on it. I pay community maintenance fees of $600 a year on the lot, as well as a water availability fee of $10 a month. Considering that the lot is held primarily as an investment, are these fees deductible for tax purposes? -- Roger

DEAR ROGER: Generally, if the lot is held for investment purposes, you should be able to deduct all reasonable expenses associated with it, including community association fees, utility bills and real estate taxes. You will not be able to take any depreciation because it is raw land.

Tax questions can be answered only generally because everyone has different financial issues. You should talk with an accountant for a specific answer.

I want to buy a home in Nevada and rent it to my sister and another tenant until I retire, in 10 years. If one of the tenants will be a relative, will the IRS consider this a legitimate rental property with rental property deductions, as long as I have a lease and can provide proof of monthly rent? Also, is there any reason why the IRS needs to know that one of my tenants is a relative? -- Bonnie

DEAR BONNIE: As long as your lease is at "arm's length" and the rent you charge is consistent with market rentals in the neighborhood, you should be able to take all the legitimate deductions available to landlords. The forms you have to fill out when you file your annual income tax return do not ask for names or family status; the IRS just wants to see the numbers.

You should consult with at least two real estate agents and get them to provide you with rental comparables. Keep that information handy in case you are audited.

I found a buyer for my home and think we can come to agreeable terms. Is it cheaper to just hire a lawyer rather than have a real estate agent do the transaction?

-- Katherine

DEAR KATHERINE: I have nothing against real estate agents and brokers. They perform a valuable service in most cases. However, if you have already found a buyer, you should consider retaining legal counsel, who can assist you in preparing the sales contract. The lawyer can also walk you through the entire process up through settlement.

An agent will charge 2 to 6 percent of the sales price. A lawyer will charge on an hourly basis. In my experience, it is usually much less expensive to retain legal counsel. More important, should problems arise, the real estate agent could not provide legal advice.

Whether or not there is a real estate agent in the picture, sellers should also have their lawyer involved in the process.

Benny L. Kass is a Washington lawyer. Questions for this column can be submitted tobenny@inman.com.

Copyright 2007 Benny L. Kass

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