DEAR BOB: About four years ago we used that "residence replacement rule" to defer the tax on our profit when we sold our home and bought a larger one. We used the rule again two years ago when my husband's job was transferred and we again bought a more expensive house. Now we want to sell our house and move to Florida to buy a condominium. Can we defer our tax a third time? Will a condominium qualify? Vivian A., Virginia.
DEAR VIVIAN: There is no limit to the number of times you can use the residence replacement rule. It requires total tax deferral on your home sale profit if you qualify. To defer the tax on your profit, you must buy a more expensive replacement principal residence within 18 months before or after selling your present residence. If you buy a less expensive replacement, your profit is taxed up to the difference in prices.
For example, if your total profit (including deferred profit) is $15,000 and your replacement residence costs $10,000 less than the sale price of your old home, $10,000 of your profit gets taxed as long term capital gain. Tax on the other $5,000 must be deferred. A condominium, cooperative apartment, houseboat, mobile home, or traditional single family residence can qualify as a principal replacement residence. But the rule does not apply to temporary or vacation residences. DEAR BOB: We now realize real estate is the best place to invest. Far better than common stocks. But we don't have much cash for a down payment. We own our home, which is worth about $68,000 and has a $15,000 mortgage. Can we refinance or get a second mortgage to raise cash for buying property? If so, which is best? Ken L., Washington, D.C.
DEAR KEN: Yes, your idle equity in your home is an excellent source of tax-free cash for investing. Your lender could care less how you plan to spend the money as long as your home offers adequate security for the mortgage loan.
In most areas, you should be able to borrow up to at least 80 per cent of your home's market value. There is no magic formula for determining if you'll be better off refinancing your old first mortgage with a new one or getting a new second mortgage. Shop for both first and second mortgages, then compare monthly payments and interest to see which you prefer.
Start with your current first mortgage lender who may be very eager to refinance your old, low interest rate mortgage on favorable terms. If yours is a 5 or 6 per cent mortgage, your lender will probably beg you to refinance because such a loan interest loan loses money for the lender.
DEAR BOB: Last November we made an offer to exchange the equity in a four-flat building we own as down payment on a 10-unit apartment house. Our exchange offer was accepted, subject to sale of our building after the trade. The realtor quickly found a buyer for our building. But that buyer wants to trade some vacant lots he owns as his down payment so now these lots have to be sold out of the trade. Do you think we should wait or is this exchange getting too complicated?Mabel Y., Virginia
DEAR MABEL: Property exchanges require patience. The benefit to you of deferring the tax on your profit is well worth the wait. I've been involved in exchanges that took as long as nine months to complete and I've heard of others taking longer.
Your exchange is progressing nicely one step at a time. As long as the other parties to your exchange are waiting patiently, give your agent more time to sell the vacant lots which often can't be sold quickly.
DEAR BOB: Our home has a FHA mortgage of $22,000 at 7 per cent interest. We want to sell the house for about $43,000.Since we don't need cash, we're thinking of asking for a $6,000 down payment and taking back a $15,000 installment sale second mortgage. Are second mortgages permitted with FHA mortgages? Frank T., Maryland.
DEAR FRANK: Yes. On resales, second mortgages are allowed whether the buyer asumes or takes title "subject to" an FHA or VA mortgage. However, second mortgages aren't allowed with new FHA or VA
Four your copy of the report "Secrets of Real Estate Finance," said 10 cents in coin and a stamped self-addressed envelope to Robert J. Bruss, P.O. Box 6710, San Francisco, Calif. 94101.