DEAR BOB: In May our friends sold their house. As their real estate agent instructed, they filled out a disclosure statement listing a few minor defects, such as leaking gutters.

Last month, their buyer's lawyer sent them a list of defects, such as the water heater doesn't heat the water hot enough, the dishwasher had to be replaced because it was a model that was recalled for a fire hazard, the front porch floor sags and the garage door spring broke. The buyers want $5,000 from the sellers or they will sue. We plan to sell our house next February or March. How we can avoid trouble like that?--Joel R.

DEAR JOEL: Unfortunately, although your friends did everything correctly by disclosing the minor defects of which they were aware, they sold to buyers who expect the house to remain in excellent condition after the sale. The sellers shouldn't be held responsible for any of the listed items, which became defective long after the sale.

However, I must add that if the sellers had bought a one-year home warranty as a sales inducement for their buyers (the cost is about $350), that policy would have taken care of the hot water heater and dishwasher replacement for a service fee of about $50.

The bad news is that anyone can sue anyone, even for frivolous claims such as those itemized. If those home buyers sue your friends, unless the case is brought in small claims court, your friends should retain a lawyer, and that costs money. Obviously, the buyers hope the sellers will settle without a lawsuit.

As far as your home sale is concerned, before listing it you should obtain a professional home inspection report, in addition to other customary reports, such as a termite inspection. Make any repairs that are obviously necessary. Disclose any known defects that you don't want to repair. Then, sell your house "as is."

An "as is" sale means the seller must disclose known defects but will not pay for any repairs. I sold a house like that a few months ago to buyers who planned to remodel it. I saved the cost of repairing some minor items, and they got a bargain purchase price. In today's litigious society, even selling a house that's in excellent condition "as is" can be a good way to avoid a lawsuit.

DEAR BOB: I have a property-line dispute with my new neighbor. The previous owner built a deck on part of my property even after I showed him the property line's location. Then, he sold his house to a new owner who says he wasn't informed about the deck encroachment.

I met with the new owner and his real estate agent. We agreed that I would pay for a new survey. The new survey shows the deck encroaches on about 9 feet by 45 feet of my land. The owner's lawyer wrote me and asked what I would take for my land, but then they refused my offer. I am retired and don't have much money. Can I sue the new neighbor to get my survey expenses and my land back?--Virgil P.

DEAR VIRGIL: Yes. How long has this deck encroachment existed? If it has been there a long time, the statute of limitations for encroachments might have expired. Or, the neighbor might have acquired a prescriptive easement to use part of your land. Contact a local real estate lawyer to discuss your legal alternatives before the neighbor's deck ripens into permanent use of your land without payment.

DEAR BOB: My girlfriend and I recently purchased a house together. Since then, things between us have gone downhill. How do we determine who gets to keep the house? I paid the $25,000 down payment and would love to keep the house because I spent extra money to make it wheelchair-accessible for me. What should I do?--James H.

DEAR JAMES: I presume you didn't have any written agreement and both hold title to the house. Because you paid the down payment, perhaps your girlfriend will sign a quit-claim deed to you if you give her a few hundred or even a few thousand dollars "walking money."

However, if she gets greedy, your legal solution is a partition lawsuit to force the sale of the house. You'll need to retain a real estate lawyer to protect your interests.

DEAR BOB: My mother, 72, has owned and lived in her condominium town house for more than 15 years. Her "out of control" condo homeowners association is headed by a president who has made threatening phone calls to my mother and who has used abusive language on several occasions.

The most recent incident occurred when she forgot to pay the $315 association dues in September. She received a "Notice of Intent to File a Lien" in October but didn't understand what it was. She paid her October dues on time, but a collection agency returned her October check, stating they would not accept the October payment until she paid the September, October and forthcoming November payments, plus nearly $500 in legal and collection fees for a total of about $1,500.

They filed a lien against her town house and are threatening foreclosure. For one missed payment, this seems an unreasonable abuse of process, and, I believe, it was done with malicious intent. According to my mother, the association is targeting owners with low mortgages or those who own their condos outright so that, upon foreclosure, the officers can buy those units. Is there a government agency that monitors homeowner associations and their officers?--Linda St.J.

DEAR LINDA: Yours is not the first letter I've received about "out of control" condo associations. Unfortunately, there is no agency that monitors condo homeowner associations.

Your mother learned an expensive lesson. I presume she paid the $1,500 to prevent further possible foreclosure action. She could sue the condo association in small-claims court for a refund of the $500 legal and collection fees, which seem excessive. I'll pass along suggestions readers send in for bringing a condo association under control.

DEAR BOB: When I bought my house, it had a small, attached rental unit, which I have rented to tenants. I allocated 25 percent of my purchase price to the rental and am depreciating this amount over the required 27 years. When I sell this property, I presume any capital gain from the rental unit and recapture of depreciation deducted will not be included in my $250,000 tax exemption. Is this correct?--Ron N.

DEAR RON: Yes. When you sell your property, which includes a house and a rental unit, for tax purposes you will be making two sales. One is the market value of the residence. The other is the market value of the rental unit. The selling price must be allocated between these two "sales."

The $250,000 ($500,000 for married couples filing jointly) tax exemption on the sale of a principal residence applies only to your profit from the sale of your home. It does not apply to the profit on the sale of your rental unit. This is presuming you occupy the house as your "main home" an "aggregate" of two of the five years before the sale.

As for your profit on the sale of the rental unit, the total depreciation will be recaptured and taxed at a special 25 percent tax rate. The balance of your capital gain on the rental unit will be taxed at a lower 20 percent rate. For more details, consult a tax adviser.

DEAR BOB: I think you made a mistake. Some time ago, you said a mother could give her adult daughter a rental property (worth about $300,000) without owing any gift tax. I think that is incorrect. Gifts that are tax-free are limited to $10,000 per year. A married couple can give $10,000 each for a total of $20,000 per year.--Marcia S.

DEAR MARCIA: Your information is incorrect. The federal gift and estate tax is unified. For annual gifts of more than $10,000, the donor must file a federal gift tax return. But no gift tax will be due if the donor's total lifetime gifts, exceeding the $10,000 per donee per year limit, do not exceed $650,000 (increasing to $675,000 in 2000). State laws vary, however, so a gift tax might be due in the state where the donor lives. For complete details, consult a tax adviser.

DEAR BOB: I am a general contractor who builds "spec houses" in a small town. I have considered the lease-option method of sales for some time and would appreciate more information.

One of my colleagues is quite successful with lease-options. He lets buyers in with no money down, other than the first month's rent. He then gives them a 20 percent rent credit for the first three years. After that, he makes the sale. Then, he carries back the mortgage at a higher-than-market interest rate.

Unfortunately, I can't afford to carry mortgages for my home buyers. Recently, I heard of another situation where, at the time the lease-option was exercised, the mortgage lender required a rent survey and denied the buyer part of the rent credit toward the down payment. Do you think lease-options will increase home sales for me?--Pat B.

DEAR PAT: I've been using lease-options to buy and sell houses for more than 20 years. When properly structured, they benefit home buyers and sellers. There are always more lease-option home buyers than sellers, so your home sales should increase.

Unfortunately, secondary mortgage lenders Fannie Mae and Freddie Mac refuse to fully accept rent credits as down payments, thus working against home buyers. This causes originating lenders to do crazy things, such as the rent survey you mentioned.

Personally, I've always been able to arrange mortgages for my lease-option home buyers by shopping among lenders. I find lenders will usually give full rent credit toward the down payment on adjustable-rate mortgages, but not on fixed-rate mortgages. Shop around among lenders in your area to find those who won't hassle your buyers about lease-option rent credits as down payments.

DEAR BOB: My husband and I are in our seventies. We want to sell our acreage and home, take the "over 55 tax break," buy a smaller home and use the leftover profit to give our kids $10,000 a year, as long as the money lasts. Can we do this to avoid paying tax and going through a lawyer?--Mrs. R.E.

DEAR MRS. R.E.: Consult a tax adviser before doing anything. The "over 55 tax break" was repealed in 1997. It was replaced by the more generous $250,000 ($500,000 for married couples filing joint tax returns) tax exemption on the sale of a principal residence. To qualify, you must own and occupy your "main home" at least two of the five years before its sale.

However, this tax exemption does not apply to other property, such as "acreage," so you will owe capital gain tax on the land sale. Yes, you can give away up to $10,000 per donee per year without owing any gift tax.

DEAR BOB: My mother-in-law died in August. I'm the executor of her estate and in the process of selling her house. She moved out six weeks before she died, and we were preparing the house for sale when she died. Does her estate qualify for the $250,000 home sale tax exemption? If it doesn't, there will be a large capital gains tax the estate will have to pay.--Ron S.

DEAR RON: The $250,000 home sale tax exemption does not apply after a homeowner dies. I hope you, as the estate executor, have an attorney advising you. Have you been appointed the executor of the estate by the probate court yet? If not, you won't be able to convey marketable title to the house as the executor until the court approves your appointment under the deceased's will.

The estate's attorney should have explained that after a property owner dies, the federal government forgives any capital gain that would have been taxable during the owner's lifetime. Perhaps it was good that the home wasn't sold before your mother-in-law's death.

If the estate now decides to sell some or all of the assets to pay bills or to make the assets liquid, a capital gain tax on the sales will not be due. This is because the assets received a new valuation "stepped up" to market value on the date of death (or alternate valuation date elected by the estate), so there is no taxable gain.

How much is your mother-in-law's net estate worth? If it is less than $650,000, you don't even need to file a federal estate tax return. However, if she left a net estate of more than $650,000, a federal estate tax will be payable. Consult the estate's attorney or tax adviser for full details.

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