DEAR BOB: As a CPA, I was fascinated by the letter from the prisoner who, after 37 months in jail, wants to sell his house when he is released in September. Applying the new Internal Revenue Code 121's $250,000/$500,000 home-sale tax exemption is more complicated than most homeowners think.

As I read your reply, I agreed that the prisoner's 37 months in jail do not count as principal residence occupancy even though he has a caretaker living in his house. Although he had 23 months of "main home" occupancy during the five years before his home sale, he needs 24. But occupying the home for a month after his jail release won't help because he will then lose a month from his occupancy time five years ago.

However, since he owned the house on Aug. 7, 1997, if he can sell his house before Aug. 7, 1999, he can claim the special pro-rated exclusion without proving the sale is because of health or employment reasons.--Richard L.

DEAR RICHARD: Thanks for your excellent advice to the home seller who's in prison. Several other readers made similar suggestions. Now you know why I always advise readers to consult a lawyer or tax adviser.

I hope that prisoner can take advantage of the special home-sale tax loophole that expires Aug. 7, 1999, which allows partial exemptions for home sales for reasons other than health or employment.

In this situation, he can claim 96 percent of his $250,000 home-sale tax exemption. If he can't sell by Aug. 7, he'll have to live in his house for 24 months after leaving prison to claim the full $250,000 exemption because the five-year ownership and two-year occupancy tests are "moving time periods."

DEAR BOB: I'm making my final home mortgage payment in December. What should I receive from the lender when I pay it off, what should I record, and is it expensive?--Bill D.

DEAR BILL: If you have a deed of trust, the lender should provide a "Deed of Reconveyance" for recording to clear your loan title. If you have a mortgage, a "Satisfaction of Mortgage" accomplishes the same result.

With your final mortgage payment, include a short letter stating that this is your final loan payment and that you want to receive an accounting from the lender and the proper document for recording within 30 days. Although you'll probably have to make the full regular payment, the last payment's exact amount is often less than your others, so you will probably receive a small refund check with the payoff accounting.

Some mortgage lenders record the Deed of Reconveyance or Satisfaction of Mortgage for their borrowers. Others mail the document to the borrower and let the borrower do the recording. The fees for recording are usually minimal, typically $25, so don't worry about that.

If you don't receive proof of final payment within 30 days, be sure to follow up. After final payment, lenders have no financial incentive to clear the loan from your home's title. Keep all your loan papers.

It's okay to have a symbolic mortgage burning party, but never burn the actual paperwork just in case a dispute arises later.

DEAR BOB: Recently, a mortgage broker told me that I couldn't get a loan unless I borrowed "hard money." Previously, I had two foreclosures. My consumer loans are current or paid off. My FICO score is 635 points, but I need 640 minimum to qualify. What is this Fair Isaac rating, and how can I get a mortgage?--Richard H.

DEAR RICHARD: FICO (Fair, Isaac and Co.) is a secret rating scheme that claims to predict if a prospective borrower will default. Few people know exactly how FICO scores are computed. Fannie Mae and Freddie Mac believe in FICO scores, so the mortgage industry goes along.

By "hard money," your mortgage broker means money lent at a higher-than-normal interest rate from a lender who doesn't sell loans to Fannie Mae and Freddie Mac. These loans are called A-minus-, B-, C- or D-quality paper. Finance companies, such as Household, Associates and Beneficial, are nationwide lenders in this "sub-par" market.

Because your FICO score is so close to acceptable, I suggest you shop among other lenders, especially mortgage bankers. The biggest are Norwest Mortgage and Countrywide. They may have a mortgage that isn't too expensive.

DEAR BOB: I assumed an FHA mortgage some time ago. Now I have 75 percent equity. But the loan service refuses to cancel my private mortgage insurance (PMI). I requested a copy of my PMI policy and lender's name, but never received a reply. It appears that there is no PMI policy on my loan and the lender is pocketing my several hundred dollars a year. What can I do to cancel my PMI?--Kaye F.

DEAR KAYE: FHA home loans have MMI (mutual mortgage insurance). PMI applies to high-ratio, conventional, non-government mortgages. Although FHA says its MMI can be canceled by the FHA lender, that rarely happens.

Because your loan-to-value ratio is only 25 percent, why not refinance to pay off your FHA mortgage? Any lender will gladly make such an easy-qualifier, low-documentation loan.

DEAR BOB: Before marriage, I bought the house where my wife and I have lived more than 10 years. If we sell our house, are we entitled to a $250,000 tax exemption or $500,000 as a married couple? Should I add my wife to the title?--Thomas M.

DEAR THOMAS: Your home-sale exemption will be $500,000 even though title to your house is in your name alone. That's presuming both you and your wife have lived in the primary residence for an "aggregate" of at least two of the past five years before its sale and you file joint income tax returns for the year of home sale. For income-tax purposes, you don't need to add your wife's name to the title before selling. Please consult a tax adviser for further details.

DEAR BOB: I am 74, and my wife is 68. We own and live on our free-and-clear farm, which our son operates. The farm is worth at least $750,000, maybe more. We don't want to sell, but the additional monthly income from a reverse mortgage sure would be welcome. Can we get a reverse mortgage based on the value of our farm?--Dennis V.

DEAR DENNIS: Nobody ever asked me that question before. After checking with David Thompson at Fannie Mae in Washington, the nation's largest originator of reverse mortgages for senior citizens over 62, I regret to report that farms are not eligible for reverse mortgages.

Also not eligible are mobile homes and "co-op" apartments. Single-family houses, approved condominiums and town houses, and manufactured homes on foundations are eligible for reverse mortgages.

DEAR BOB: My wife, 74, and I, 76, bought our farm in 1946. We held it and hoped that, with inflation, its sale would supplement our Social Security. The farm has greatly increased in market value because of inflation. We now face high capital-gains taxes when we sell.

On our tax returns, how do we show all our maintenance through the years, such as fences built and maintained? We also built a chicken house, barn, machine shed and hog house. The fences were replaced at least three times. We don't have complete cost records for 53 years. The buildings were not depreciated on our income tax returns. How do we come to an estimate of our adjusted cost basis?--Chilton W.

DEAR CHILTON: Please consult a tax adviser or lawyer. You should have been depreciating those buildings and fences on your income tax returns. The result would have been lower income taxes. But you can only amend your tax returns for the past three years.

The general rule is that your adjusted cost basis is the purchase price, plus capital improvements, minus deducted depreciation. The IRS can accept reasonable estimates for capital improvements. However, farm maintenance and repair costs should have been deducted annually.

After you and a tax adviser arrive at an adjusted cost basis, subtract it from your farm's adjusted sales price--the gross sales price minus sales costs such as commissions--to arrive at your capital gain.

DEAR BOB: When my husband and I bought our first house two years ago, we didn't know that our neighbor's yard would eventually overgrow into ours. Two huge trees hang over our sleeping area, which makes us nervous during storms. Bamboo and ivy have crawled under, through and over a chain-link fence. Nothing we have done seems to control it.

The tenant living in the house is the owner's stepson. We are not on the best of terms with either of them. What is the best way to approach this situation? What legal rights do we have?--Jamie R.

DEAR JAMIE: If the trees are on your neighbor's property, you can trim the branches back to the property line. However, be careful: If you kill or damage the trees, you could be liable for damages. A rule of reasonableness applies.

However, if your neighbor will give you permission to enter the property, you might offer to pay to have the trees trimmed. Hire a professional tree trimmer who is licensed and insured because tree trimming is dangerous work.

As for the growing vegetation, the same rule applies. You can trim or remove the bamboo and ivy that have entered your side of the fence if it is on the property boundary. Legally, you can't force the neighbor to remove the vegetation on his property.

A great book on this topic is "Neighbor Law: Fences, Trees, Boundaries & Noise," third edition, by Cora Jordan (Nolo Press, 1998, $17.95).

DEAR BOB: My wife and I live in a duplex that my elderly mother-in-law owns. She lives on one side, we live on the other. She wants to give us the duplex now because we pay the property taxes and insurance but don't get tax deductions because we don't hold title. However, we are also in her will to inherit the property. Would having our names on the title now smooth the probate process? My mother-in-law doesn't want to worry about any paperwork. What should we do?--Mike S.

DEAR MIKE: Please consult an estate-planning lawyer. If your mother-in-law has a very low adjusted cost basis for the duplex and she deeds it to you now, you and your wife take over that low basis. When you eventually sell, you might have a huge capital gain. Only the profit from the half of the house that is your personal residence would be tax-free up to $500,000 after at least two years of your ownership.

However, if you take title by inheritance, when your mother-in-law dies, you and your wife get a new cost basis stepped up to market value on her date of death. In the meantime, you get no itemized income-tax deduction for the property taxes you pay. Because you didn't mention any mortgage, I presume there is no mortgage interest to deduct.

When you consult an estate-planning lawyer, be sure to discuss a revocable living trust. If your mother-in-law transfers title to the living trust now, upon her death title can go to you and your wife without probate costs and delays. In the meantime, I wouldn't be concerned about the lack of income-tax deduction for property taxes. You're probably better off taking the standard deduction instead.

DEAR BOB: I would like to make a long-term real estate investment. What type of property do you recommend?--Nancy T.

DEAR NANCY: Personally, I invest in fixer-upper single-family houses. I've found them to be easiest to buy, finance, manage, refinance and profitably resell after fix-up.

DEAR BOB: After reading your explanation of the new $250,000/$500,000 home-sale tax exemption, I have a question. We've owned and lived in our house for eight years. We work out of our home and have taken business deductions for 50 percent of the property tax, insurance and utilities, but no deduction for depreciation. When we sell our house, is there a capital-gains tax based on the deductions we've taken?--Norm W.

DEAR NORM: No. The home-office deductions you list are "ordinary and necessary" business expenses. If you deducted home-business depreciation after May 7, 1997, at the time of principal residence sale, that depreciation would be "recaptured" and taxed at a special 25 percent tax rate.

Because you have not claimed any home-office depreciation for your residence, it appears you need not be concerned because you have no depreciation to recapture and tax. Please consult a tax adviser for details.

DEAR BOB: Recently, you have commented several times about the biweekly mortgage scams. I agree that the idea makes sense, but the enrollment fees of several hundred dollars are a waste of money because the borrower can do everything on his own.

Recently I received a mailer from Bank One, a mega-bank, which offers a biweekly mortgage conversion with no enrollment fee. I understand the Bank One plan is available to the public, regardless who holds the mortgage. The only cost is a $1 electronic drafting fee for each biweekly mortgage payment. What do you think of this idea?--James T.

DEAR JAMES: Thanks for sharing this information. It's the best biweekly mortgage plan I've seen so far. Bank One is a well-capitalized bank, so borrowers need not worry about doing business with it.

In the literature you sent, Bank One gives an example of a $100,000 30-year home loan at 7.5 percent with an $820 monthly payment. By making two biweekly $410 payments each month, the borrower saves $43,570 interest by cutting off 7.3 years and effectively reducing the interest rate to 5.67 percent. It's worth a phone call to 1-800-774-5170 for Bank One's free, personalized mortgage savings quote and more details.

DEAR BOB: I own a two-family house with my 35-year-old unmarried son. He lives in one unit and rents the other. I am 68. What happens after my death? I presume the house goes to him?--Ram S.

DEAR RAM: The answer depends on how you and your son hold title to the property. If it is held in joint tenancy with right of survivorship, when one joint tenant dies, the surviving joint tenant automatically receives the deceased's share without probate. In most states, to clear the title, the surviving joint tenant must record a certified copy of the death certificate and an affidavit of survivorship.

However, if you hold title with your son as tenants in common, or another method, when you, or your son, die, your share passes according to the terms of your will. Whoever inherits the deceased's share receives a new basis on that share stepped up to market value on the date of death. Please consult a lawyer to check on the title status, your will and the best way to hold title. As I often recommend, a living trust may be the best title-holding choice to avoid probate.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.{copy} 1999, Tribune Media Services Inc.