DEAR BOB: My wife and I bought our house many years ago and its market value has greatly appreciated. Unfortunately, my wife died last year. If I sold my house today, I would have a profit of at least $400,000. Because the home sale market is so "hot" in our community, I am considering selling and moving to a retirement home.

I realize that if I do that I will owe tax on the $150,000 sale profit exceeding $250,000. It occurred to me that if I add our 24-year-old son's name to our title--he still lives at home--I could get another $250,000 of tax-free profits. What do you think of this idea?--Roger L.

DEAR ROGER: Not much. First, please consult a tax adviser. Depending on how you and your late wife held title to your house, you probably received a new stepped-up basis on all, or at least 50 percent, of your home's value when she died. This new stepped-up basis will substantially reduce, or eliminate, your profit exceeding $250,000 when you sell your home.

Second, adding your son's name to the title won't help until he has held title for 24 months. Then he can qualify for his $250,000 principal residence tax sale exemption. To qualify, he must have owned and occupied the principal residence at least two years within the five years before the sale.

However, if you give him a 50 percent interest in your residence, that could create a gift-tax situation if you have given away more than $650,000 of lifetime gifts. This is another reason to consult a tax adviser before deciding if you should sell.

DEAR BOB: We are under contract to buy a new house that is now under construction. When it is completed, should we have a professional inspection, as you recommend to buyers of resale houses?--Greg H.

DEAR GREG: Get a professional inspection before closing the sale. In the past few years, I have heard so many horror stories of shoddy home construction that I now recommend professional inspections of even new houses.

Unfortunately, home buyers cannot rely on local city or county building inspectors to spot home defects.

Before closing the sale, the buyer holds all the leverage. After the closing, if the builder doesn't correct "callbacks," the buyer only has recourse in the courts. That's why buyers of new houses need professional inspections before completing the purchase. Your modest professional inspection cost of around $300 will be money well spent.

DEAR BOB: I've heard about reverse mortgages for senior citizens. Please explain a reverse mortgage. How does this plan work? Must the money be repaid? What happens to the home's remaining value when I die? Is interest charged? What are the risks of reverse mortgages? Are they a "good deal"?--Pauline S.

DEAR PAULINE: Reverse mortgages are for homeowners who are at least 62 years old and who have either a small loan or no loan. Such a mortgage can provide lifetime tax-free monthly income, credit lines and/or lump-sum payments for costs such as roof replacement, property taxes and even a new car. Yes, interest is charged by the lender.

No payments are required until the homeowner permanently moves out, sells the house or dies. Then the principal and interest must be repaid. If the homeowner outlives his life expectancy, and more is owed than the house is worth, the lender takes the loss. Any remaining equity in the house after the homeowner dies goes to the heirs.

FHA and Fannie Mae are the major nationwide reverse mortgage lenders, except in Texas, where state law prohibits reverse mortgages. In Arizona, California, Colorado and Washington, Financial Freedom Plan makes reverse mortgages up to $700,000. Fannie Mae even offers reverse mortgages for senior citizen home purchases, requiring no monthly payments.

Reverse mortgages are designed to provide senior citizens with tax-free income to live in their homes as long as they desire. Yes, they are a "good deal" if you are over 62 and plan to live in your home at least five years.

DEAR BOB: I fully agree with your recent remarks that the Internet is a great place to start a home quest. About three months ago, I accepted a job offer in a different city. Being a "techie," my wife began our house hunt on the Internet. She started at www.realtor.com and found several houses that seemed to meet our criteria. She also searched other Web sites, but she discovered that most of the listings were outdated, sold or had pending offers.

However, she contacted several of the listing agents. One agent e-mailed and phoned us, insisting on taking us on a tour. Although he was a bit too aggressive, he showed us several new listings, one of which we bought and live in today. That's how Internet surfing led us to our near-perfect home.--Rich C.

DEAR RICH: Thank you for sharing your Internet home buying experience. From what I hear, it is typical for many buyers to start home searches on the World Wide Web but to wind up buying other houses.

DEAR BOB: My wife and I bought our house in 1986. We separated in 1993 when I moved out; we divorced in 1995. The separation agreement allowed my ex-wife to live in the house until June 1999. We now have sold the house. My net profit was only about $18,000. My tax adviser says I owe capital gains tax on my $18,000 because I did not live in the house the last 24 months before the sale, but my former wife gets her share tax-free. Is this fair?--Troy H.

DEAR TROY: Good news. Your tax adviser is wrong. Because your ex-spouse, living in the house, qualified for the $250,000 principal residence sale tax exemption as the "in spouse," Internal Revenue Code 121 allows you, the "out spouse," also to qualify for up to $250,000 of tax-free home-sale profits. No longer is the ex-spouse who does not live in the home disqualified. You need a new tax adviser.

DEAR BOB: When we refinanced our mortgage last year, we agreed to an impound escrow account for property taxes and fire insurance. Our local bank then sold our mortgage to a distant lender in Texas. They failed to pay our homeowner's insurance. I called our insurance agent, who called them. Our insurance agent finally was paid, but the lender charged us $352 for "emergency insurance" and now refuses to credit $352 back to our escrow account. What should we do?--Harry W.

DEAR HARRY: Complain loudly. Ask the loan service who regulates their operation and find out if they are licensed to do business in your state. Complain strongly to the appropriate regulator. Also, find out who now owns your loan. If it's Fannie Mae or Freddie Mac, you can contact their Consumer Affairs office in Washington for help. Your situation shows why I recommend that mortgage borrowers avoid impound escrow accounts.

DEAR BOB: I lived in my primary residence until December 1995. Then I moved to my condominium in Melbourne, Fla., for six months each year, spending the other six months in my former home. What will it take to get that new $250,000 home-sale tax exemption on my primary residence?--Franklin H.

DEAR FRANKLIN: I've got good news for you and thousands of other homeowners in similar situations. New Internal Revenue Code 121 says that to qualify for the new $250,000 ($500,000 for a married couple filing joint tax returns) home-sale tax exemption, you must live in the home an "aggregate" of at least two out of the five years prior to the sale.

It appears you qualify. Although you lived in your Florida condo for six months each year, the other six months in your former home gives you an aggregate residency well over the 24-month minimum occupancy during the past five years.

Because each home was your principal residence for the six months you lived there each year, either residence can qualify for the $250,000 exemption when you sell it. However, you can use this great new tax break only once every 24 months. Check with a tax adviser for full details.

DEAR BOB: My will names my daughter to inherit a rental house I own. It's not my residence and I want to give her the house now, rather than waiting until I die. Your recent column on giving away real estate mentioned that the property's cost basis for my daughter will be the same as my low basis. However, I am concerned about the gift tax cost I will owe to the IRS.--Leon J.

DEAR LEON: Although your donee daughter will take over your low-adjusted cost basis for the gift house, for gift tax purposes that house is valued at today's market value. Presuming the house is worth more than $10,000 ($20,000 if your wife is a co-owner who joins in the gift), you'll need to file IRS Gift Tax Form 709.

If today's market value of the house is worth less than your lifetime $650,000 gift-estate tax exemption, no gift tax will be due. But you still must file the Gift Tax Form with the IRS for annual gifts exceeding $10,000 per donee. The tax rates for gift and estate taxes are the same once your lifetime $650,000 combined gift- and estate-tax exemption is used up. Ask a tax adviser for more details.

DEAR BOB: We have a VA mortgage at 9 percent interest. I recall reading in your column about a "streamlined VA refinance mortgage." But when I contacted the bank that holds our VA mortgage, they wanted to charge us fees that are almost as high as getting a new VA mortgage. If our VA mortgage interest rate is just being reduced, why do we have to pay all those extra charges?--Mr. G.H.

DEAR MR. G.H.: It sounds as if your current Veterans Affairs mortgage service does not offer a "streamlined VA refinance mortgage" to reduce your interest rate. Theoretically, all that is needed is to modify your existing VA mortgage to reduce its interest rate.

If your payments have been on time, requalification and reappraisal should not be necessary. One nationwide lender that, I understand, welcomes refinances of existing VA mortgages is Countrywide. They have offices in most major cities.

DEAR BOB: About six years ago my husband and our teenage son built a family room at the back of our house. Now we want to sell the house. One real estate agent says, since no building permit was obtained, we must now obtain a city building permit and bring our home up to current building-code rules. The addition is safe as it was well-built. Do we have to get a building permit to sell our house?--Gladys S.

DEAR GLADYS: You must disclose to potential buyers that the family room was added without a building permit. If a city building inspector learns of the non-permit room addition, although that is unlikely, you could be required to get a building permit and pay a penalty fee. The inspector also could require you to remove parts of the walls to check wiring.

A few cities have code-enforcement programs at the time of house sales. That usually means a building inspector checks the home's history of building permits, and inspects the house for building-code violations. You may be required to take out a building permit if the inspector notices the non-permit family room addition.

If I were you, I would visit the city building permit office. Without giving your name or address, explain the situation. Ask if you must get a building permit and have the family room inspected before the sale. In most cities, you are not required to do so. Ask a local real estate lawyer for further details.

DEAR BOB: Almost two years ago, I entered into a lease with option to buy with my tenant. She would now like an extension. May I modify the lease-option and change the purchase price since market values have gone up? My CPA says I must restart the lease and pay income tax on the entire $7,200 rent credit accumulated from the lease. Is this correct?--Jacques P.

DEAR JACQUES: I think your accountant is giving you bad advice. I hope you've been reporting all the rent money you've received on Schedule E of your income-tax returns. Then the IRS will never accuse you of not reporting all of your income. Forfeited rent credit money only becomes taxable to you if you didn't report that income in the tax year received. And rather than cancel the existing lease-option, a better procedure is to modify it to extend the term and increase the option purchase price.

That way the rent credit and other conditions remain unchanged. The tenant's option money also doesn't become taxable, as ordinary income, as it would if you were to write a new lease-option. For more details, please consult a different tax adviser or lawyer.

DEAR BOB: Our family owns a small chain of mom-and-pop grocery stores. We are considering buying an established convenience grocery store that is located in the middle of a residential neighborhood. Because it was there before the nearby houses were built, it is a nonconforming commercial-use property. My attorney says we shouldn't buy it even though the price is a bargain. What is your advice?--Lona W.

DEAR LONA: Your big risk is if more than 50 percent of the building is damaged or destroyed, it probably cannot be rebuilt. However, the lot may be worth more for a conforming residential use.

If you decide to buy, you'll probably have difficulty getting a mortgage due to the zoning. Unless you pay cash, or the seller's estate will finance your purchase, you probably can't get a mortgage. Just be sure you understand the risk of buying a nonconforming-use property.

DEAR BOB: Is a home seller free from future lawsuits and liability problems after the sale closes? Is full and honest disclosure enough to assure no future legal problems?--Richard W.

DEAR RICHARD: Unfortunately, in today's litigious world, sellers and their agents are never safe from buyers. Most states now have statutes and court decisions requiring sellers to disclose in writing to buyers all known defects in the residence. In states without such laws or precedent court cases, agents encourage sellers to fill out voluntary disclosure forms. Such disclosures protect both sellers and agents. However, as you know, anyone can sue anyone.

To give a personal example, in 1990 I lease-optioned a house to tenants. In 1992, after living in the house more than two years, they exercised their option and bought. In 1996 they sued me for fraud, alleging I should have known the master bedroom foundation, which was built by a previous owner in 1965 with a building permit, would start sinking. After we went to non-binding, court-ordered arbitration, they dismissed their lawsuit. But I had to waste time and money defending that frivolous lawsuit.

Honest sellers can't guard against unscrupulous buyers like that. Unfortunately, the statute of limitations for fraud doesn't start running until alleged fraud is discovered. This creates a virtually open-ended statute of limitations. For more details, please consult a real estate lawyer.

DEAR BOB: When a buyer and seller sign the contract, the buyer risks losing the deposit for canceling the sale. But what binds the seller to complete the sale? After the buyer goes through the work of obtaining a mortgage, what happens if the seller cancels the sale at the last minute?--Mr. P.M.

DEAR MR. P.M.: That's an easy question. If the home seller fails to deliver the deed as agreed, the buyer can sue the seller for specific performance of the sales contract. To prevent the seller from selling to another buyer, or refinancing, such a buyer should also record a "lis pendens," which means anyone dealing with the property does so subject to the outcome of the pending litigation. For more details, please consult a real estate lawyer.

DEAR BOB: I recently read about Freddie Mac and Fannie Mae plans to give relief to their borrowers from private mortgage insurance. But what about those of us who have FHA mortgages? Is there any PMI relief in sight for borrowers with FHA mortgages?--Mary and

Michael W.

DEAR MARY AND MICHAEL: No. As you probably know, FHA home loans have mutual mortgage insurance (MMI), which is a variation of PMI. Every time I write about this topic, I receive a friendly letter from an FHA bureaucrat who says FHA lenders are free to cancel MMI insurance for their borrowers at any time. However, few ever do. If you want to get rid of your MMI fees on your FHA mortgage, my best advice is to refinance with a non-FHA loan.

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