QDEAR BOB: Because of you, about five years ago I got a reverse mortgage on my house. It relieved me of a great amount of worry about my retirement income, which didn't stretch enough to keep up with inflation. But when I received my 2003 property tax bill, I realized the market value of my home was nearly $100,000 higher than when I obtained my reverse mortgage. I called my reverse-mortgage company, Financial Freedom. My monthly reverse mortgage payments more than doubled. Tell all the other senior-citizen reverse-mortgage holders out there to keep an eye on what their homes are worth now. -- Lucy B.

ADEAR LUCY: I should have explained that senior-citizen reverse mortgages can be periodically renegotiated (refinanced) as the market value of the home appreciates.

You should see all the mail I receive from senior citizens who say the reverse-mortgage upfront fees are too high. They are expensive, but each lender must provide prospective borrowers with a Total Annual Loan Cost (TALC) chart. For senior citizens who plan to stay in their home fewer than five years, the TALC interest rate is quite high. The longer you stay in your home, however, the lower your TALC.

The benefits of a reverse mortgage are too numerous to list. But you are proof of why senior homeowners should not deprive themselves of the financial enjoyment of their retirement years.

DEAR BOB: When my mother died in 1991, my stepfather was granted a life estate in her house. Since then, he has let the house fall apart. What can I do to ensure that when he passes on the house is in decent condition? -- Charles M.

DEAR CHARLES: Assuming you are the legal remainderman, meaning that you will receive title to the house after the life tenant dies, you have a legal right to ensure the life tenant is maintaining the house. He must pay the property taxes, mortgage interest, fire insurance and other upkeep costs.

If you can prove your stepfather is allowing it to deteriorate, you have grounds for a lawsuit to terminate his life estate for "waste." Consult a lawyer for details.

DEAR BOB: My wife's parents died several years ago and left her their house, which has great sentimental attachment for her. She will not rent the house or sell it. The last time we visited the vacant house, the lawn was dying and filled with weeds, the paint was peeling and the inside looked bad. How much value will a house lose in five or 10 years if it is neglected? -- Don G.

DEAR DON: No one can give you an exact answer. In most communities the market value of homes that are not in hopeless condition continues to gradually appreciate, but a deteriorating empty house is eventually worth the price of the lot alone.

Because the house has been vacant for more than 30 days, I doubt that any insurance company will insure it against losses from fire, vandalism, liability and other causes. This is a dangerous situation where vandals might enter the house and damage it or set it on fire just for thrills.

If your wife is averse to risk, you should explain the high possibility of loss for an uninsured vacant house and the personal liability she would incur if someone is injured on the property.

DEAR BOB: Thank you for warning about the pitfalls of paying cash for a home. We sold our home and were flush with tax-free cash, so we bought a townhouse with an 80 percent mortgage. Our homeowners association became involved in a lawsuit against the developer. It looks as if there will be a settlement, but my husband's job will probably be transferred within a year and we will have to sell. -- Cheryl W.

DEAR CHERYL: If you had paid cash for your townhouse, it might be difficult to sell with a lawsuit pending. However, because you have a first mortgage of about 80 percent of market value, if you should have to sell, the mortgage lender will probably allow your buyer to assume the existing mortgage upon payment of an assumption fee, perhaps 1 percent.

That's far better than having all your cash tied up if lenders refuse to make new loans because of the lawsuit.

DEAR BOB: My mother and I are joint tenants with right of survivorship in her home. Several months ago she suffered a stroke and is getting worse. I had to put her into a long-term care facility. Although her bills keep growing, I have her power of attorney so I have been able to pay her bills by selling her common stocks. Her major asset is her home, which she owns free and clear. Is there any way I can sell her home to pay her bills without her signature on the deed? -- David C.

DEAR DAVID: Consult a lawyer who specializes in elder law. The situation might require court appointment of a conservator or guardian to represent your mother's interests in the sale of the home. I assume you were added to the title before her stroke.

Your circumstances show that it is important for homeowners to hold their titles in a living trust to avoid probate and to provide for the possible incompetence of an owner. Joint tenancy with right of survivorship avoids probate but doesn't cover a home sale under the conditions you describe.

DEAR BOB: I just completed an Internal Revenue Code 1031 Starker tax-deferred exchange for investment property. How long must I hold title to the property before I can exchange again? -- Ethel S.

DEAR ETHEL: There is no minimum holding time for a property acquired in a tax-deferred exchange. You can trade the acquired investment or business property as soon as you wish. Of course, you must meet the IRC 1031 requirements, such as a trade-up for a more valuable property without receiving any taxable "boot," such as cash or net mortgage relief. Consult a tax adviser for details.

DEAR BOB: For several years I have owned a townhouse as an investment. About a year ago, my tenant moved out and my brother asked if he could move in. I stupidly agreed. We didn't discuss the rent or my expenses for the mortgage, insurance, homeowner association dues and repairs. My brother graduated from high school but is lazy. He turned down a post office job as "too boring." Instead, he works as a part-time bag boy at a supermarket. He says he can afford to pay me $300 per month rent, but my expenses are more than $1,100. My tax preparer said I couldn't claim any tax-deduction losses exceeding my rent income. Is this correct? -- Diana D.

DEAR DIANA: Not exactly. You have two strikes against you. One is that the rent you receive is far below your expenses and probably way beneath the market rent. The second is that you are renting to a relative.

Therefore, your tax preparer is correct that you are not entitled to any tax loss deductions for the rental townhouse. However, your property taxes and mortgage interest are always fully tax-deductible, even if they exceed the rental income paid by your brother. Maybe it's time to insist your brother pay market rent.

DEAR BOB: I have been a home inspector for many years. You are correct to tell home buyers to reject inspectors recommended by a real estate agent unless that agent provides the names of at least five local professional inspectors. How can we handle our relationships with realty agents who can refer us lots of business but who won't do so if we discover any serious defects? -- Dirk H.

DEAR DIRK: The conflict you describe has no easy remedy. You're doing your job as best you can, but the agents don't want your inspections to kill their home sales.

Although the home buyer is paying your inspection fee, try not to be a nitpicker over minor circumstances you discover. Just point out the possible problem without making a big deal of it. And why not invite the real estate agents to accompany you on your inspections so they can see for themselves the thorough job you do?

DEAR BOB: More than five years ago I rented my condo to tenants who have been there ever since. Last month they moved out because they bought a house. Now I have decided to sell my condo, which has appreciated in market value by about $175,000. Before I rented the condo, I lived in it for about four years. When I called my tax adviser, she said my condo sale will be subject to capital gains tax. Is there any way I can qualify for that $250,000 tax exemption you often discuss? -- Robert R.

DEAR ROBERT: You can move back into the condo and make it your principal residence again for at least 24 months before you sell it. Then you will meet the Internal Revenue Code 121 requirement of principal-residence ownership and occupancy for at least two of the five years before a sale.

Because you have rented your condo to tenants for five years, you clearly don't meet the IRC 121 occupancy test. If you sell it now, your capital gain will be fully taxable.

DEAR BOB: I own my home free and clear. I have lived in it more than 30 years and plan to stay until they carry me out feet first. But I need more income, so I investigated reverse mortgages. My difficulty is that my late husband had a $40,000 income-tax lien recorded by the IRS against his business. Somehow, that lien attached to our house. The reverse-mortgage representative says if I am to obtain a reverse mortgage, I must use $40,000 of "lump sum" reverse-mortgage proceeds to pay off that tax lien. Why should I have to pay off his $40,000 income-tax lien from the equity in my house? -- Elaine R.

DEAR ELAINE: Reverse mortgages can only be recorded as first mortgages. If the IRS recorded a valid tax lien against your home, which I assume was jointly owned with your late husband, the reverse-mortgage lender can't approve the transaction without paying off the $40,000 income-tax lien.

DEAR BOB: About six years ago my 23-year-old nephew asked me to co-sign on a mortgage so he could buy a townhouse, which I did. Within three years he got mixed up with a bad crowd. Because he has no income, the mortgage company has contacted me, as co-signer, threatening to ruin my credit score if I don't pay my nephew's $8,700 of unpaid mortgage payments. Isn't there some law against hounding mortgage co-signers? If there isn't, there should be. -- Grace A.

DEAR GRACE: If the primary signer on a mortgage doesn't pay, the lender can go after the co-signer. The risks of co-signing are high. Frankly, I am surprised your nephew's default hasn't already ruined your credit score. Have you checked it lately on the Web at www.myfico.com?

I assume you've tried to talk with your nephew but that he doesn't care. If you pay that $8,700 default without receiving a quitclaim deed to the townhouse so you can sell it, I would let the house go to foreclosure sale even if your credit is ruined. Consult a lawyer for details.

DEAR BOB: My wife and I own and live in one apartment in our fourplex building. If we decide to sell, can we claim that $500,000 tax exemption you often discuss? -- Robert T.

DEAR ROBERT: Your capital gain on the sale of the apartment you occupy -- and only that apartment -- qualifies for the Internal Revenue Code 121 exemption of up to $500,000 for a married couple filing jointly. To qualify, you must have owned and occupied your apartment for at least 24 of the 60 months before the sale. However, your profit on the sale of the three rental units will be subject to federal capital gains tax, currently 15 percent.

DEAR BOB: I am looking into refinancing my 10-unit apartment building. The mortgage broker recommends an "interest-only" mortgage for 10 years, when there will be a balloon payment. Good or bad? -- Derek R.

DEAR DEREK: Part good, part bad. The good part is that interest-only makes your monthly mortgage payment fully tax-deductible as interest. The bad part is that a balloon payment will be due in 10 years. How will you pay it?

If you anticipate selling the property before 10 years, that's fine. Or if there is a rollover provision to an amortized mortgage, that's good.

But without an exit strategy when the balloon payment comes due, the mortgage could quickly become a bad deal.

Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him through his Web page, www.bobbruss.com.

{copy}2004, Inman News Service