DEAR BOB: I read an article that said homeowners forfeit their $250,000 home-sale tax exemption if they move out and rent the house to a tenant. That's what I did about a year ago.

I plan to rent my old principal residence, where I lived almost 10 years, for two years while on a temporary out-of-town job assignment. After two years, I may have to sell the house to move near my employer's home office. Have I lost my $250,000 home-sale tax exemption?--Carter W.

DEAR CARTER: No. Several readers sent me that newspaper clipping--the writer's information is more than two years behind the times.

The 1997 Tax Act created the new $250,000 home-sale tax exemption--up to $500,000 for married couples filing jointly. Principal-residence sellers qualify if they owned and occupied their primary residence an "aggregate" of two years during the five years before sale.

You clearly qualify. However, if you don't sell your principal residence within 36 months after moving out, you no are longer eligible. Renting your former principal residence up to 36 months before selling it won't disqualify you. For more details, consult a tax adviser.

DEAR BOB: As a landlord, I especially enjoy your too-infrequent remarks about lease-options. What terms should I add to my lease to convert it to a lease with option to buy? Are there any Web sites with lease-option forms? Suppose I give my rental-house tenant a two-year lease-option with a $500 per month rent credit. Do I report this to the IRS as rent income? How do I treat it when the tenant buys the house and exercises the option?--Jane S.

DEAR JANE: You need a special lease-option form. Do not try to convert a regular lease into a lease-option. The best forms I've seen are from Professional Publishing Co. at their Web site (www.profpub.com).

Report all rental income from your tenants, including the rent credit, on Schedule E of your income tax returns. When the tenant exercises the purchase option, subtract the tenant's rent credit from the home's gross sales price, just as you would subtract a real estate sales commission as a selling expense, to arrive at the adjusted sales price.

DEAR BOB: A mortgage broker recently gave me a "good faith estimate" for refinancing my home loan. He said it's a "no-point loan," but included are a $1,500 origination fee, a $1,500 discount fee, a $150 preparation fee and a $250 escrow-closing fee. The total fees of $4,681 seem high. What is your opinion?--Thomas S.

DEAR THOMAS: This clearly is not a "no-point" or "no-cost" mortgage. Only the $250 appraisal fee and $20 credit report charge are reasonable. The lender's other fees are inflated, such as the $200 underwriting fee, $500 processing fee and $180 document preparation fee. Your situation is typical of mortgage broker ripoffs, but your quoted 7.375 percent interest rate seems like a bargain. I hope you locked it in before the rates went up recently.

Since you are refinancing, the $3,000 total loan origination and discount fees are not tax-deductible in the year paid. Instead, they must be amortized over the mortgage life. That's why I recommend getting a "no-cost mortgage" at a slightly higher interest rate for refinancing.

DEAR BOB: I am a single homeowner. I'm thinking about adding my sister's name to my title. She and her husband own their home, which they bought about a year ago. Are there any advantages or disadvantages if I add her name to the title?--Henry T.

DEAR HENRY: Adding your sister could be a major mistake. If she gets into financial trouble, your house could become liable for her debts. If you leave your house to her by your will, your estate is subject to costly probate expenses and delays.

A far better alternative is to put your home's title into a revocable living trust. You can then name your sister to receive title to the house and other major assets, but you can change the living trust at any time. She can also be named successor trustee in case you become incompetent, thus avoiding the necessity of a court-appointed conservator. An estate-planning lawyer can explain all the living trust advantages.

DEAR BOB: My wife and I paid $74,000 for a condominium where we lived for four years while stationed at George Air Force Base in California, which closed in 1992. Since then, the condo's value plummeted to about $55,000. We owe $64,000.

It is rented for $650 per month, with a $613 FHA mortgage payment plus $100 condo association fee. I'm still in the military. Should I let the mortgage company have the condo rather than pay about $15,000 out-of-pocket to sell? Are there any special programs for situations like mine when a military base closes and property values decline?--Lt. Col. Thomas C.

DEAR THOMAS: I am not aware of any special government or FHA mortgage programs for situations like yours. If you let the FHA mortgage go into default, your credit will be ruined. Unfortunately, there's no easy answer to your question; however, if you sell at a loss, since it is rental property, that ordinary loss is deductible against your other ordinary, taxable income. Please consult a tax adviser before deciding.

DEAR BOB: Last year my wife and I bought a house using only my income to qualify for the mortgage. She had a part-time job that paid practically nothing. Now, we're getting a divorce.

I'm trying to get her name off my mortgages since I'm keeping the house as part of the settlement. The first- and second-mortgage companies want thousands of dollars to remove her name from the mortgages. It seems like a moneymaking scam to me. What options do I have?--J.C.

DEAR J.C.: There's no advantage to getting your ex-wife off the mortgages. She may pressure you to do so, but that's her problem, not yours. Someday, you'll probably refinance. Until then, don't worry about having your ex-wife's name on the mortgages.

DEAR BOB: I recently inherited some hillside property in Southern California. The county won't let anyone build on it because an earthquake fault runs through it, but I'm stuck paying property taxes for this worthless land. How can I get rid of it? Can I donate it to the U.S. Forest Service?--Paul R.

DEAR PAUL: If title has not yet been transferred into your name by the estate, notify the executor that you want to reject the inheritance. However, if title has been transferred and you stop paying property taxes, the lot eventually will be sold by the tax collector for unpaid real estate taxes. But be sure the credit bureaus don't report the unpaid taxes on your credit reports.

Yes, if the U.S. Forest Service will accept a gift of your lot, that would solve your problem.

DEAR BOB: Until she died in January 1998, my wife and I owned our house for 25 years. I now want to sell it and move to a smaller house. I anticipate a large profit because its market value has appreciated greatly since we purchased. Will my tax-free profit be $250,000 as a single person or $500,000 as a married person?--Joel S.

DEAR JOEL: Internal Revenue Code 121 allows a widow or widower to claim up to $500,000 of tax-free home-sale profit if the residence is sold in the year of the spouse's death.

Since you didn't sell the house in 1998, under current law you can claim only up to $250,000 in tax-free profit. However, several proposed changes, now before Congress, would allow widows and widowers to claim up to $500,000 of profit.

Depending on how you and your wife held title to the home, you may not have as large a profit as you think. The reason is, you probably received a new "stepped-up basis" to market value on either 50 percent or 100 percent of the home's market value, as of the date of your wife's death. Please consult a tax adviser to calculate your home's adjusted cost basis, including the stepped-up basis.

DEAR BOB: After about three years of ownership, we sold our house. At the closing, almost six months ago, we were told we would get a partial refund from the FHA for our insurance. I phoned the FHA lender last week and was told they can no longer help us because our FHA loan was paid off when we sold. What should we do? How much of a refund will we get?--Tanya S.

DEAR TANYA: You are referring to the FHA mortgage insurance premium you probably paid at the time you bought your home. Since you sold in less than seven years, you are entitled to a partial premium refund.

After 36 months of ownership, you should receive a refund of about 60 percent of the premium paid. Call the HUD support center at 1-800-697-6967 with your FHA case number for more details. Many mortgage insurance premium refunds go unclaimed because the borrowers move and the FHA doesn't know where to send the checks.

DEAR BOB: We have received several offers in the mail from home equity lenders. They suggest we pay off our credit cards with a home equity loan at around 9 percent interest. If we do this, can we deduct the interest on our tax returns?--Herman W.

DEAR HERMAN: Yes. Interest on home equity loans up to $100,000 is tax-deductible as itemized homeowner's mortgages. A tax adviser can provide full details.

DEAR BOB: When we bought our house about a year ago, we insisted on an owner's title insurance policy, and we paid the fee at that time. I was told the policy is typically issued 30 days after the closing but becomes effective immediately. It took two letters and about five months to finally receive our policy, which is dated four months after we took title. Although we have no title problems, were we covered immediately?--Mitch B.

DEAR MITCH: Yes. Your complaint is quite common. Title insurers are in no hurry to mail the policies, probably because they have no financial incentive to do so. But you were covered for insured title claims from the date your home sale closed.

DEAR BOB: My husband and I want to buy our first house, but coming up with a down payment is our main hurdle. We've heard about Fannie Mae's "Flex 97" plan, with a 3 percent down payment, but learned it involves dreaded PMI premiums. Is there any way to buy for about 10 percent down payment without PMI?--Dolores H.

DEAR DOLORES: Yes. You can do it with 80-10-10 financing, which involves a 10 percent cash down payment, an 80 percent first mortgage and a 10 percent second mortgage either carried back by the seller or obtained as a home equity loan.

A variation is 80-15-5 with a 5 percent down payment, 80 percent first mortgage and a 15 percent second mortgage. If the seller won't carry back the second mortgage, many first-mortgage lenders can arrange a second mortgage for up to 20 percent of the value.

DEAR BOB: When we bought our house six months ago, we had a home inspection and a termite inspection. Neither report said anything about termite damage, but spring weather brought massive termite "swarmers." Since then, we've learned about obvious termite damage in the unfinished section of the basement.

To conceal the most severe termite damage, our sellers covered the main structural beam with foam, nailed boards into the beam and stained them to look like the beam. There is upwards of $30,000 in termite damage and we are hopeful the termite inspection company will pay for the repairs. Can the sellers also be held liable for repair costs?--Mrs. T.B.

DEAR MRS. T.B.: Yes. Did you receive a seller disclosure form listing known defects in the house? Today, most home sales involve such disclosures to protect sellers and realty agents from future lawsuits.

Your challenge will be proving the sellers knew about the termite damage. The evidence seems to be proof, unless the cover-up was done by a previous owner.

In any event, the termite inspection firm is clearly liable for failing to discover the termite damage. Getting the firm to pay will probably be much easier than suing the sellers. Please consult a real estate lawyer for details.

DEAR BOB: I own a single-family rental house with title in my name. If I put its title into a living trust, what is the tax basis upon my death if this house goes to my widow? If she is trustee of my living trust, will she owe capital gains tax? Instead, if the property goes through probate court, won't she get a new stepped-up basis? Isn't probate better than a living trust?

--Leonard S.

DEAR LEONARD: Probate is never better than a living trust. The primary purpose of putting title to your major assets, such as real estate, into a living trust is to avoid probate costs and delays. Living trusts do not change the tax status.

If you put the title to your rental house into your living trust, which specifies your wife is to receive it when you die, she will get a new stepped-up basis under the marital-property tax exemption. However, when the surviving spouse dies, that's when total assets exceeding $650,000 get taxed under current federal estate tax law.

You and your wife should consult an estate-planning lawyer now to set up your living trusts to avoid probate. There is no advantage to going through probate unless you have disputed creditor claims.

DEAR BOB: Before purchasing our house, we did a walk-through inspection with the seller's realty agent. I asked if I could take interior photos as I measured the rooms for our furniture. He said okay.

But when we had the final inspection just before title transfer, the sellers complained that my taking photos invaded their privacy. Did I commit a faux pas?--Terri P.

DEAR TERRI: The seller's agent shouldn't have given permission to take photos without consulting the seller. But you asked first, so the agent's approval was sufficient. Your letter reminded me that some appraisers now want to take interior photos. That happened to me last year. I told the appraiser "no," but I still got the mortgage.

DEAR BOB: My husband died a year and a half ago and I was left with a 4,000-square-foot house with two mortgages. I decided to sell, as it was too big and expensive to maintain. The real estate agent I selected had an excellent track record; she had sold my stepfather's house in three weeks and my rental house in three days. Since February 1999, she has advertised well and held open houses at least twice a month.

There are lots of lookers, but no offers. The price has been reduced three times, but I can't reduce it any more and still have cash for the commission, a down payment and closing costs on a smaller house. The house is 11 years old and immaculate. Why hasn't my house sold in this excellent market?

My listing doesn't expire until October 1999, a stupid mistake on my part, but I didn't think it would take more than 90 days to sell. What should I do?--Lynn B.

DEAR LYNN: When there is nothing physically wrong with a house that has been listed for sale a long time, like yours, the problem is usually that the asking price is too high. Your need for cash has nothing to do with your home's market value.

Since you're committed to that realty agent, get her to prepare a new comparative market analysis. This form shows recent sales prices of comparable nearby houses, asking prices of similar neighborhood homes and asking prices of recently expired competitive listings. I suspect your house is grossly overpriced; otherwise, it would have sold by now.

Why did you sign that eight-month listing agreement? Home sellers should never sign a listing for longer than 90 days. Perhaps there is a problem with your agent. Maybe she is disliked by other agents who don't want to do business with her. You'll never know. But cut your asking price if you want to get your house sold.

DEAR BOB: I have heard it's possible to assume someone else's FHA mortgage and save the closing costs. How do I find these opportunities?--Sue W.

DEAR SUE: Local real estate agents can check the local multiple-listing service for assumable mortgages. However, MLS listings do not always state when an existing mortgage can be assumed by buyers. Older FHA and VA mortgages can be assumed, as can many adjustable-rate mortgages. Work with a savvy realty agent to find homes with assumable mortgages.

DEAR BOB: My husband and I want to sell our condo and use the proceeds to buy half of a house that we've owned, as joint tenants with my parents, for the past 15 years. Both are rental properties. The condo is worth about $80,000, and the house is worth around $160,000. Can we do this, or is it likely to trigger an IRS audit?--Iris Y.

DEAR IRIS: Since you already own 50 percent of the rental house and want to acquire the other 50 percent from a closely related party, I'm not sure any tax expert can say for certain whether you can qualify for a tax-deferred exchange. Of course, your parents will be taxed on their sale profit.

How much is your profit on the $80,000 condo sale? If you sell it and make a Starker IRC 1031(a)(3) delayed exchange, but the IRS disallows the trade, how much capital gains tax will you owe? Unless the tax is huge, it may be worthwhile to make the exchange and hope the IRS doesn't audit and deny your exchange. Please consult a tax adviser.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.

{copy} 1999, Tribune Media Services Inc.