Q: DEAR BOB: I was married in September. A month earlier, my husband sold his house, taking advantage of that $250,000 home-sale tax exemption you often discuss. We now live in my home, a property I've owned for 11 years. We plan to sell it this spring or summer.

Can I still claim the $250,000 exemption on this sale? If I wait another year to sell my house, would I be entitled to $500,000 tax-free capital gains? To complicate matters a bit more, I have a home office for which I have been taking deductions. How will that affect the tax situation?

--Ann G.

A: DEAR ANN: Your situation is a classic example of how the $250,000 principal residence sale tax exemption can be increased to $500,000 by getting married. Clearly, you meet the tax law's requirement of ownership and occupancy for at least two of the past five years before sale.

However, your husband won't become eligible for the additional $250,000 home sale tax exemption until after he has resided in your home for at least 24 months. Since he sold his old home in August and claimed his $250,000 exemption and since this tax break can be used only once every 24 months, he will become eligible again in September 2001.

Interestingly, Internal Revenue Code 121 requires just one spouse to hold title if the other non-title spouse meets the two out of past five years occupancy requirement, as your husband will after September 2001. However, both spouses must file a joint tax return in the year of principal residence sale.

As for your question about home-office use, if you deduct depreciation in the year of home sale, then you must allocate the principal residence's sales price between the office and residence portions. Only the profit on the principal residence portion is eligible for the $250,000/$500,000 tax exemption. That's why you should probably discontinue home-office deductions after 2000 if you plan to sell in 2001. Consult a tax adviser for full details.

DEAR BOB: We recently sold rental property that we have depreciated for our 16 years of ownership. Will we owe income tax even though it was sold for less than our initial purchase price?--William S.

DEAR WILLIAM: Probably. If you sold for more than the property's depreciated book value, called the adjusted cost basis, you will owe capital gains tax.

For example, suppose you paid $100,000 for the property and depreciated it by $1,000 for each of 16 years. That brings your adjusted cost basis down to $84,000. Suppose you sold the property for $90,000. Although that is less than your $100,000 purchase price, it is $6,000 above your depreciated adjusted cost basis, so the $6,000 capital gain is taxable at a 20 percent federal tax rate.

DEAR BOB: What is considered "investment property" when making an Internal Revenue Code 1031 tax-deferred exchange? Does rental property qualify?--Mr. H.C.

DEAR MR. H.C.: Rental property is business or investment real estate that qualifies for an IRC 1031 "like kind" tax-deferred exchange. Virtually any property, except your personal residence or "dealer property," such as new houses owned by a home builder, can qualify for a tax-deferred exchange.

DEAR BOB: I am a professional home builder and I read your recent comments recommending that home buyers obtain a professional inspection of new houses. I think inspections of new homes are a farce. Views such as yours cause builders to have unnecessary problems with buyers.

If a buyer checks a builder's reputation thoroughly, talks with owners of that builder's houses and visits a model home, a professional inspection should not be needed. It's difficult enough for builders to deal with buyer demands these days without a professional inspector finding cosmetic things wrong with the house to justify fees.

We give a one-year warranty on our new homes and we correct any items that need attention. Your suggestion of home inspections for new homes is totally wrong.--Ken S.

DEAR KEN: I'm sure you build excellent quality homes. If I were a home builder, I would probably feel as you do--that professional inspections aren't necessary. Read the next letter for a different viewpoint.

DEAR BOB: We recently moved into our new house and are having nothing but trouble trying to get the company that built the house to correct its many problems. Is there any organization that governs how soon new house defects must be corrected?

We have contacted the builder's vice president of operations many times and even faxed him a multi-page list of problems. All we get is, "We'll get back to you," or "We're working on that." We haven't even received the upgrades for which we paid extra. We're tired of living in a new house that is not truly finished. What should we do?--Susan F.

DEAR SUSAN: If you are a regular reader, you know I recommend all buyers of new and resale homes make purchase offers contingent on the buyer's approval of a professional inspection report. If you had done this, your inspector probably would have recommended you not close the home purchase until the defects were corrected by the builder. Before the sale closes, the buyer has leverage over the builder. After the sale closes, the buyer loses that leverage.

Since your letter is postmarked from California, I presume your new house is in California, which fortunately, licenses its contractors. Shockingly, not all states require contractors to be licensed. Since you've tried being nice, before hiring a real estate lawyer, file a complaint, which explains the home's defects, with the state contractor's license board. That usually brings fast action from the contractor. If the problems are found to be valid, the contractor's license can be revoked.

DEAR BOB: I am 65 with one adult child, so I have no reason to consider a living trust for my estate. Can I provide a quit-claim deed with my daughter's name on it, notarized but not recorded, and keep it with my will to prevent high cost lawyer's fees and probate? My daughter can record it after I die. Should I also add my daughter's name to my checking and savings accounts? I can truly trust her.--Robert C.

DEAR ROBERT: To be valid, a real estate deed must be unconditionally delivered to the grantee during the grantor's lifetime. Signing a quit-claim deed now, but not delivering it to your daughter now, is not effective delivery. Your idea will not prevent her unnecessary probate costs and delays.

As you know, a revocable living trust is the best way to ensure your assets are distributed as you wish after your death without probate costs and delays. Equally important, if you become incompetent and unable to manage your affairs, your successor trustee, such as your adult daughter, can manage your affairs. Your checking and savings accounts, as well as stocks and bonds, should be included in your living trust.

This living trust asset management advantage can become extremely important, for example, if you get Alzheimer's disease and your home must be sold to pay for your convalescent home care.

DEAR BOB: We bought our new home in March 1998. Because of our excellent credit and a 17 percent down payment, the bank where we obtained our mortgage did not charge us private mortgage insurance on our 83 percent mortgage.

A few months later, however, another bank bought our mortgage. Last July the new bank notified us that not only was PMI being applied to our mortgage because our down payment was less than 20 percent, but the PMI was also retroactive to July 1998 because the new bank overlooked our PMI when our mortgage was bought.

The bank informed us it was aware our home had already risen significantly in value, so we would probably be eligible to cancel the PMI in July--the bank has a two-year minimum PMI period. This situation increased our monthly payment by $200 a month. Can the Homeowner's Protection Act of 1998 help us?--Kathy S.

DEAR KATHY: I am shocked you agreed to pay the extra $200 per month. A new lender cannot retroactively change the loan terms of the existing mortgage and you should have complained to a state or federal regulator. You should immediately contact the second bank's president and demand immediate PMI termination and full refund of your wasted PMI premiums paid. Unfortunately, the Homeowner's Protection Act of 1998 only applies to new mortgages, not to existing older mortgages such as yours. However, that shouldn't stop you from getting your PMI money refunded from your lender. If necessary, take that bank to small-claims court.

DEAR BOB: We rented a condominium to a tenant who stopped paying rent shortly after moving in, so we hired a lawyer. Last month, we obtained a judgment against the tenant for more than $3,500 and a possible eviction.

But the lawyer has made no effort to collect the judgment. He told us that he's not interested in working on a contingency basis and wants 40 percent of the judgment amount up front with no guarantee of collecting it. Instead, should we hire a collection agent, an aggressive lawyer or a bounty hunter? We want to teach this petulant young renter a lesson.--Kathy B.

DEAR KATHY: I have never heard of a lawyer demanding 40 percent of a judgment amount in advance, with no guarantee of collecting it. Collection agencies typically charge that amount, but only after the judgment is collected.

A good collection agency will find assets of your ex-tenant that can be attached, such as a bank account. Not until part or all of the judgment is collected does the agency get a percentage. Bounty hunters, by the way, are used in many states to locate bail-bond jumpers, not deadbeats such as your ex-tenant.

DEAR BOB: Recently you said mortgage escrow or impound accounts for property tax and insurance payments are usually required only on VA, FHA and private mortgage insurance mortgages. I requested escrow account relief from my lender, but was denied. My loan says "subject to applicable law or written waiver by lender." My lender says it might waive the escrow account only after two years of satisfactory payments. Is there any law to give me relief from this lender thievery?--Douglas H.

DEAR DOUGLAS: Since there is no federal law on this issue, the exact answer depends on state law where your property is located. Unfortunately, escrow accounts can be required by lenders, except in states that prohibit these lender rip-offs. Some lenders even charge borrowers "escrow waiver fees" of $200 or more.

The time to bargain with lenders is before the mortgage is originated. If the lender wants the loan, it gladly will waive escrow accounts, usually for no charge. But after the escrow account exists, as you discovered, it's often difficult to get the lender to cancel this "free money" source.

DEAR BOB: Sometime before the end of 2000 I plan to leave my "day job" as a newspaper advertising salesman. As I am 84, I plan to focus on my talents as an author and freelance writer. To facilitate the transition, I want to establish a line of credit secured by the equity in our home.

It is a town house, worth about $190,000 with a mortgage balance around $13,000 at 6.99 percent adjustable interest. I would use a basic draw on the credit line of $2,000 per month. Should we get a regular home equity loan or use a reverse mortgage?--Bill L.

DEAR BILL: Carefully investigate the home equity credit line and reverse mortgage alternatives before deciding. Both are good choices for your new lifestyle. With a reverse mortgage, there are no income requirements. Your small $13,000 mortgage can be paid off from an initial lump-sum payment. You can then draw on your reverse mortgage credit line as needed, up to a maximum amount, based on your age and your spouse's age. No payments are required during your lifetime or your spouse's, who must be at least age 62.

However, with a home equity loan, monthly payments of at least interest are required. As the home equity loan balance grows, your monthly payments will also increase. Also, you will need adequate income from other sources, such as Social Security, pension, interest and dividends, to qualify for the home equity credit line.

The interest rate on the reverse mortgage will be higher than for the home equity credit line, especially in the first few years. But the longer you live, the lower the reverse mortgage interest rate becomes due to the amortized upfront loan fees.

DEAR BOB: Our condominium homeowner's association is involved in a lawsuit pending in court. Must the seller of a condo disclose such a lawsuit? If so, must the seller, real estate agent, condo management company or the association make the disclosure?--Mr. R.R.

DEAR MR. R.R.: The condo seller is responsible for making the important disclosure of a pending lawsuit that is a material fact affecting the condominium. The seller should disclose the nature of the lawsuit so a prospective buyer can evaluate if the result will have a positive or negative effect on the condo buyer and the association's financial situation.

For example, if the association is being sued and if the case is lost, a special assessment on the condo owners might be required to pay the judgment. However, if the association is suing the developer or builder, a positive result would be beneficial to the association and its members.

DEAR BOB: I am retired and want to transfer real estate titles to my children so they can have the tax deductions for mortgage interest and other deductibles. Also, then I won't have the hassle of selling the properties to others. Is this a good idea?--Retired

DEAR RETIRED: Think carefully before you give away your real estate. You must file a gift tax return for each gift of more than $10,000 per donee per year. However, no federal combined estate and gift tax will be due if your lifetime gifts total less than $675,000 in 2000 and prior years.

Are your children 18 or older? If they are minors, do not even consider giving them real estate. The primary reason is that minors can receive title, but they can't convey it. Also, are your children capable of managing the properties? Before giving away your real estate, consult a lawyer or estate planner to discuss all the pros and cons.

DEAR BOB: Our mother recently made her will. She will leave a certain amount of money to two daughters, two sons and one nephew from the sale of her home after her death. I know we will have to go through probate. What else do we need to do to sell the house when the time comes?--Isaac A.

DEAR ISAAC: Exact probate details vary in each state. The general procedure is for the estate executor named in the will to gather the decedent's assets, such as bank accounts, stocks, bonds, personal property and real estate, and determine which creditors are owed how much. The probate court will appoint an administrator if no executor is named or if no will is found.

The next step is to sell assets, if necessary, to pay the creditors and the expenses of estate administration. Then the remaining assets are distributed to the heirs named in the deceased's will. In your situation, since your mother's will directs that the house is to be sold and the proceeds distributed, the executor or administrator will handle the sale.

Probate proceedings usually take a minimum of six months, but often a year or longer. State law determines the fees of the estate lawyer and the executor or administrator.

However, all these unnecessary costs and delays can be avoided if your mother transfers her major assets, including the house, into a revocable living trust before she dies. After her death, the successor trustee, such as an adult child, will transfer the living trust assets according to the terms of the living trust.

The living trust procedure is simpler, faster and cheaper than probate. A local estate planning lawyer can provide full details. A superb book on this topic is "Make Your Own Living Trust" by Attorney Denis Clifford (Nolo Press, Berkeley).

DEAR BOB: Fourteen years ago I bought 13 acres of land on a Southern California mountainside. At the top is a large microwave dish, which is some distance from my land. For the past year, I have had my lot listed for sale.

My realty agent told me the mountainside road is now chained off, before reaching my property, and a fence is being put up. A sign says, "Danger: Microwaves." I suppose I'm paying taxes on a now-worthless lot. Do I have recourse? Does the microwave company have liability to me?--Beverly M.

DEAR BEVERLY: Retain a local real estate lawyer to protect your property interests. Presuming you have easement rights to use that road to reach your land, you should protect those rights so they aren't lost.

If the microwave company makes your land worthless, you are entitled to either have the nuisance abated or monetary damages paid to you. Yes, you have legal recourse, but you must take prompt action to protect your rights.

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

(C) 2000, Tribune Media Services Inc.