QDEAR BOB: My mother wants to help my sister buy a modest home. I recall your writing about joint tenancy with right of survivorship and tenancy in common for holding title. What is the best arrangement so Mom can get the tax deductions for payments she makes until my sister gets on her financial feet? -- Frances C.

ADEAR FRANCES: Your question provides a great opportunity to compare the pros and cons of these two methods for two or more co-owners holding title to real estate.

Joint tenancy with right of survivorship means the surviving co-owner owns the entire property if a joint tenant dies. All joint tenants are equal owners. A joint tenant owner's will has no effect on joint tenancy property.

No probate proceedings are required after a joint tenant dies. In most states, the surviving joint tenant need only record a certified copy of the other joint tenant's death certificate and an affidavit of survivorship to clear the title.

But tenants-in-common ownership shares can be unequal, such as 40 and 60 percent. Each owner's share in a tenants-in-common ownership arrangement passes according to the terms of his will or living trust.

Joint tenancy with right of survivorship is probably best for your mother and sister. As for the tax deductions, if your mother is on the title and she makes the payments until your sister can take over, Mom can take the deductions. For more details, your mother and sister should consult a tax adviser and real estate lawyer.

DEAR BOB: Just after we made our purchase offer on a house, our buyer's agent asked us to sign a statement saying we would pay $200 to his brokerage for administrative work. Our agent never told us he charged an administrative fee. Is this common? Do we have to pay? -- Laurie M.

DEAR LAURIE: An "administrative fee" is a junk fee charged by some realty brokerages to increase their profit. The fees go to the brokerage, not to the sales agent, although a few firms now give a portion of the fees to sales agents to make them more acceptable. If home buyers and sellers protest these fees, the brokerages might stop charging them in addition to sales commissions. Unless you really like your buyer's agent's service, I would refuse to pay $200 for a fee that gives you no benefit.

DEAR BOB: We hold a mortgage that says the entire balance shall become due and payable on June 1. Since the buyer didn't make the balloon payment, does the property automatically belong to us? -- Michael D.

DEAR MICHAEL: No, but the exact answer depends on state law where the property is located. Most states have a grace period of 10 to 15 days for late mortgage payments during which no penalty can be assessed or foreclosure begun. After that, you can begin foreclosure to obtain title or payment in full.

If your loan security was a deed of trust, you should record a Notice of Default to begin foreclosure. However, if the security was a mortgage, which is to be foreclosed judicially in court, then a foreclosure lawsuit must be filed against the borrower.

I suggest you hire a real estate lawyer who specializes in foreclosures to handle this matter. Be sure to get him to specify his fee in writing so there is no misunderstanding.

Depending on the state where the property is located, there might be a redemption period after the foreclosure sale during which the defaulting owner can redeem the property. You would either get paid in full by the highest bidder at the sale, or you would receive title to the foreclosed property.

DEAR BOB: About five years ago, my son and I bought a fixer-upper in a rough area, but it showed promise. I put up the $35,000 down payment and co-signed on the mortgage. My son did a fantastic fix-up job on the house while he and his roommate lived in it. Now he has a purchase offer, which will show about $375,000 in net profit. I realize his profit up to $250,000 is tax-free, but is there any way to also make my profit tax-free? -- Sherman R.

DEAR SHERMAN: As a non-resident investor, you can't qualify for the tax exemption under Internal Revenue Code 121. For details, consult a tax adviser.

DEAR BOB: When I moved to Spain on a six-month assignment from my employer, I hired a real estate agent to manage my U.S. house, collect the rent and pay the bills. "Temporary" turned into more than two years, with no end in sight, but I like living in Barcelona. My property manager tells me the rental market for my vacant house is "difficult" but the sales market is strong. She recommends selling. What would you do? -- Jeanie R.

DEAR JEANIE: Unless you plan to return to your former residence someday, sell now. The rental market for houses and apartments is weak in many communities, mostly because of the low mortgage interest rates and easy home-loan qualifications. That has depleted the supply of quality renters for houses such as yours.

Be aware of the ticking clock of Internal Revenue Code 121. If you still meet the two-out-of-the-last-five-years ownership and occupancy test, then up to $250,000 of your profit will be tax-free. For details, consult a tax adviser.

DEAR BOB: I own a summer home in Indiana, which I bought for $64,000 in 1985. If I leave it to my son, will he have to pay the capital gains tax on it? It is worth about $250,000 today. -- Sam M.

DEAR SAM: It is better to inherit property than to receive it as a gift before the owner's death. The primary reason is that inherited property receives a new stepped-up basis of market value on the date of the owner's death. No capital gains tax will usually be due if the property is sold soon thereafter.

If you give the property to your son before you die, he would take over your $64,000 adjusted cost basis and would incur a substantial capital gains tax when he sells.

DEAR BOB: You said not to buy a retirement home for cash even if one could afford to do so. As a result, we bought our retirement condo for a 10 percent down payment with a 90 percent mortgage. Although we like our condo, the homeowners association is a disaster. The construction defects are outrageous and many buyers have rented their condos to less-than-desirable tenants. If worse comes to worst, my wife and I will default on our mortgage and walk away. We are so thankful we didn't invest our retirement nest egg in what looked like a great condo complex. -- Stephen B.

DEAR STEPHEN: Thank you for sharing your experience about what can happen when a situation goes bad.

DEAR BOB: Many years ago, my mother and her sister bought a rural property together as an investment. It was rented to an adjoining farmer for a share of his annual crop profits, and my mother and her sister received superb annual payments. However, my mother died in July 2003. Since then, her sister claims that all the crop profits received from the tenant farmer go to her. My mother left no will. As her only surviving child, shouldn't I be entitled to half of the rent? -- Daniel D.

DEAR DANIEL: The answer depends on how your mother and her sister held title. If it was held in joint tenancy with right of survivorship, then your mother's sister is the surviving joint tenant and is entitled to full ownership without probate. You then receive nothing.

However, if they held title as tenants in common, your mother's title passes according to the state law of intestate succession, which determines who inherits the property of people who leave no will.

If you are her closest surviving relative, you would probably inherit her share, including entitlement to the tenant farmer's annual rent payments. For details, consult a real estate or probate lawyer.

DEAR BOB: I have owned a rental four-plex for about 18 years. I recently received an excellent unsolicited purchase offer from an adjoining owner, which I accepted. I want to use the sales proceeds to acquire a rental house owned by my sister, but the rental house is worth less than my four-plex. I will use the extra cash to pay off credit card debt and reduce my home mortgage balance. Will this be a tax-deferred exchange for me? -- Grace A.

DEAR GRACE: No. Internal Revenue Code 1031 requires that tax-deferred exchanges of "like kind" rental or investment property be an up-trade to a qualifying property of greater market value and that the up-trader receive no taxable cash or "boot," such as net mortgage relief. Your situation clearly does not qualify for tax deferral. For details, consult a tax adviser.

DEAR BOB: What do you think of the new "interest-only" home mortgages? As a longtime mortgage broker, at first I didn't recommend them to my borrowers. But in some situations, such as when a home buyer expects to stay in the home only a few years, I began to think these loans were a good deal for the borrower because in the first few years there isn't much mortgage principal payoff anyway. -- David G.

DEAR DAVID: I agree, but homeowners who plan to stay in their residences "forever" should not borrow on an interest-only mortgage because they won't be gradually paying down their mortgage balance.

Also, interest-only mortgages are great for investors who want to keep their monthly payments at a minimum while making 100 percent of their payments tax-deductible as interest. More details on the tax aspects are available from a tax adviser.

DEAR BOB: My husband and I own two deeded property vacation timeshares, and we have always been thrilled with our vacation experiences. We learned to buy deeded property instead of "right of use" timeshares. Now we use one timeshare to trade for vacations in other areas, but we like to use our Orlando timeshare, as it is one of our favorite places to vacation. Why do you discourage timeshare purchases? -- Julia H.

DEAR JULIA: Most people are not as wise as you were about buying timeshares. The primary reason I suggest buying vacation timeshares only with money you will never need again is that they are virtually impossible to resell for their purchase price.

A secondary reason for being extra careful is the rising annual fees for most timeshares. As resorts get older, they need more repairs, so the fees often rise 10 to 20 percent per year.

A third reason for not buying a timeshare is the difficulty of getting rid of it. Most timeshare developers and property managers refuse to take timeshares back, even for free. With many timeshares still available, most developers want to sell their "new" timeshares rather than take back resale timeshares from unhappy buyers.

DEAR BOB: I formerly worked for a nationally franchised famous-name broker that charges home sellers a $495 administration fee and home buyers a $195 processing fee. To sweeten these fees for us agents, the firm gave us $50 from each fee we collected at the home-sale closing. I found this procedure despicable. So I left and am now happily affiliated with a smaller firm, which doesn't charge home sellers or buyers any fees other than the customary sales commission. -- Jen H.

DEAR JEN: Congratulations on leaving your brokerage because of the garbage fees. Real estate brokers should be able to profit sufficiently from the traditional real estate sales commissions without charging additional fees to home sellers and buyers.

DEAR BOB: I am considering selling a rental house I own. My plan is to invest the sales proceeds into another rental house I own to improve it, also paying down the mortgage balance. Will this qualify as a tax-deferred exchange? It seems to comply with the spirit of the law. -- Doug W.

DEAR DOUG: Because you already own the rental property you want to improve and pay down its mortgage balance, it would not qualify for an Internal Revenue Code 1031 tax-deferred exchange. IRS revenue agents don't think about the "spirit" of the law.

IRC 1031 requires you to acquire a qualifying "like kind" rental or investment property of equal or greater market value without receiving any taxable "boot," such as cash or net mortgage relief. For details, consult a tax adviser.

DEAR BOB: Some time ago you gave a formula for calculating the maximum number of rentals in a condo complex. What is that formula?

-- Jim W.

DEAR JIM: There is no formula for determining when there are too many rentals in a condo complex, but Fannie Mae and Freddie Mac, the secondary-mortgage market giants, usually will not buy a condo loan if more than 30 percent of the units in the complex are rentals.

When there are more than 25 percent rentals, many lenders charge higher-than-normal interest rates, because absentee condo owners usually vote against assessments for repairs and maintenance. In addition, renters usually don't take as good care of the property as do owner-occupants.

The foreclosure rates on condos where more than 25 percent of the units are rentals are usually much higher than where most of the condos are owner-occupied. I recommend not buying a condo in a complex where more than 10 percent of the units are rentals.

DEAR BOB: Why are you opposed to mortgage escrow accounts for property taxes and insurance? If I get rid of my escrow account, will my monthly payment be lower?

-- Keisha R.

DEAR KEISHA: When property is serviced by a mortgage lender, escrow accounts for property taxes and insurance premiums are great. But so many problems develop with loan servicers that I can't recommend escrow accounts.

Lenders often overcollect, make mistakes, and forget to pay the taxes or insurance bills on time. Worse, many dishonest lenders that make late payments take the late fees from the escrow accounts without telling their borrowers.

If you already have an escrow account with your mortgage, and if your lender is properly servicing it, leave it alone.

However, if you spot any irregularity, it's time to get tough with your lender.

Canceling your mortgage escrow account, however, won't save any money because you still must pay your property taxes and insurance.

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

{copy}2004, Inman News Service