The new Bruss report, "How Tax-Deferred Property Exchanges Can Pyramid Your Wealth," is available for 25 cents plus a self-addressed STAMPED envelope sent to Robert J. Bruss, Box 6710 San Francisco, Calif. 94101.
DEAR BOB: We are considering renting our present home and buying another. At what point does our present home become "investment property" and subject to capital gains tax? If we decide to sell our present home in five years can we reinvest the equity in our new home and avoid paying profit tax? Ken M., Rockville.
DEAR KEN: When you convert your personal residence into rental property, it then qualifies as "investment property." Then you get all the tax benefits, such as deductions for maintenance, insurance, and depreciation, that you don't get when the house is your personal residence. No capital gains tax is due since you haven't sold the property.
If you sell the house in five years, you will then owe capital gains tax on your profit. You cannot avoid the tax by reinvesting the proceeds in your personal residence. The tax reason is that you are selling investment property, not your personal residence. Only if you sell your principal residence and buy a more costly replacement can you defer the profit tax. Ask your tax advisor for complete details.
DEAR BOB: Please tell me what books I should read to get started in real estate investing. I'm so afraid I would make a costly mistake. After reading your articles, however, I realize that real estate is the best inflation hedge. Charlotte M., College Park.
DEAR CHARLOTTE: Read William Nickerson's classic, "How I Turned $1,000 into $3,000,000 in Real Estate in My Spare Time," and Albert Lowry's "How You Can Become Financially Independent by Investing in Real Estate," both published by Simon & Schuster and available at larger libraries and bookstores.
To keep up on new realty development read Real Estate Investing Letter (United Media, 757 Third Ave., New York 10017, $36 per year), Real estate Investment Journal (18872 MacArthur Blvd., Irvine, Calif. 92715, $6 per year), Financial Freedom Report (4751 Holladay Blvd., Salt Lake City 84117, $36 per year) and Housing (McGraw-Hill, 1221 Avenue of the Americas, New York 10020, $30 per year).
DEAR BOB: Several times you've written that the seller is the best and cheapest source of financing when buying a home. A local real estate agent showed me her listing book, which has many homes listed for sale. But not one of those listings said the seller would carry the mortgage for the buyer. How do you find "seller financing" homes for sale? Brent M., Laurel.
DEAR BRENT: Rarely will a listing say "seller financing." You, the buyer, must make the seller want to finance your purchase. You do this by making a written purchase offer. Provide in it for the terms you want on the mortgage you want the seller to carry back for you. If there's already a mortgage on the home, you can often take over its payments and the seller will then take back a second mortgage for you.
Most sellers, until your offer is presented, have no intention of financing your sale. But when they see your offer, providing for $100, $200, or more monthly payments, that's when they realize the benefits. A sharp realty agent can be a big help convincing the seller to finance your purchase.
DEAR BOB: What do you mean when you refer to home equity? Len M., McLean.
DEAR LEN: Equity in any property is the difference between its fair market value and the amount owed on its mortgages. For example, if my home is worth $100,000 and I owe $60,000 on its mortgages, $40,000 is my equity.