QDEAR BOB: I read your response to that reader saying a married couple can qualify for the full $500,000 principal-residence-sale tax exemption even if only one spouse held title. My mother is soon going to sell the house where she has lived for 23 years. She is to marry this month. If she sells her house after the wedding, can she qualify for the full $500,000 tax break? Her real estate agent says that because her new husband never lived in the house, she only qualifies for $250,000 tax-free. -- Stephanie R.

ADEAR STEPHANIE: Internal Revenue Code 121 only requires one spouse's name to be on the title of the principal residence being sold to claim the full $500,000 exemption (instead of just $250,000 for a single home seller). But both spouses must meet the occupancy test.

Because your mother qualifies but her new spouse hasn't lived in the principal residence an aggregate two of the past five years -- and therefore doesn't meet the occupancy test -- she can only qualify for up to $250,000 in tax-free profits.

DEAR BOB: We opted for upgrades that our home builder offered at a discount if we borrowed from the builder-owned mortgage company. The sales agent assured us our mortgage rate would be no higher than 1/8 percent over the market rate. But now we discovered our mortgage is about 1/2 percent higher than market rate. We have excellent credit and have shopped around to discover we qualify for the lowest rate. But the purchase price of our house will go up about $20,000 if we do not finance with the builder's mortgage company, which refuses to offer a competitive rate. What should we do? -- Priya R.

DEAR PRIYA: In real estate, as you discovered, a sales agent's oral statement means nothing. To be enforceable, any real estate promises or agreements must be in writing and properly signed.

Be sure your new home loan from the builder's mortgage company does not contain a prepayment penalty. Then you can refinance with a lower-interest-rate lender after your home purchase closes. If the builder's loan is 1/2 percentage point higher than the market rate, that means your discount on the builder's upgrades will be expensive unless you refinance with another lender to lower your interest rate.

DEAR BOB: My husband and I have both been married before, but our investments are separate. We are of modest means and are both retired. Because of the divorce settlement and an inheritance, the home we live in is in my name alone. What worries me is, on occasion, my husband drinks too much when he is with his buddies. He then drives across town to come home. I have told him that he could injure himself or someone else. I am afraid of losing my home in a lawsuit. We have proper insurance on our vehicles. Even if the home is in my name alone, can this happen? -- Connie A.

DEAR CONNIE: Under the circumstances, you are wise to keep the title to your house in your name alone. If you add your husband's name to the house title, and if your husband gets a court judgment against him, depending on state law, the house equity might be subject to execution on that judgment.

Should your husband become involved in an accident and if his auto insurance is inadequate to pay a court judgment for negligence, the injured plaintiff might try to enforce that judgment against your house. But in most states, such an attempt would fail because the house is your separate property.

Even in a community property state, because you owned the house as your separate property before the marriage, it remains your separate property unless your husband contributes to it financially.

My suggestion is to review your insurance protection with several insurance agents, not stating the reason for your concern, of course. To illustrate, my insurance agent recommends I carry $300,000 liability insurance on each property, and on my car, plus a $2 million "umbrella liability" policy, which would apply to any negligence judgment against me over $300,000.

DEAR BOB: I have been paying my private mortgage insurance (PMI) fees on my home mortgage for more than two years. I just called my lender and was told I must have a loan-to-value ratio of 75 percent (not the 80 percent I anticipated) to cancel PMI. I was also told I must get an appraisal from a recognized appraiser. Some time ago, you suggested borrowers file lawsuits in small-claims court to get rid of PMI. At what point should I sue my lender and for how much? -- Stefan C.

DEAR STEFAN: PMI enabled you to buy your home for little or no cash down payment. In return, you had to pay the PMI monthly premiums, which protected your mortgage lender on the top 20 percent in case of your loan default loss.

First, get a professional appraisal of your home from a licensed appraiser. Ask your lender for names of its recommended appraisers in your area. Your appraisal cost should be $300 to $400.

Second, understand that lenders can set their own rules for canceling PMI premiums (which are often $100 or more per month), within federal law. If your mortgage is owned by Fannie Mae or Freddie Mac, they require at least 20 percent homeowner equity and an on-time payment record before canceling PMI.

Third, if you don't have your lender's required 25 percent equity to cancel your PMI premiums, then you can decide if you want to make a pest of yourself to try to persuade the lender to cancel the fees.

If you have solid evidence of at least 20 percent home equity, based on the professional appraisal, you might want to sue your lender each month in small-claims court for refund of your monthly PMI premium. However, be sure to always pay your full monthly mortgage payment, including that PMI fee.

After a few months of default judgments, most lenders give up and cancel the unnecessary PMI. But it's a pain to file the breach of contract and/or fraud lawsuit each month, pay the small-claims court fees, and have the lender served with the summons and complaint (usually by certified mail; the small-claims court clerk can help with this).

I've never used this method, but many readers report success with it.

DEAR BOB: I have owned and lived in my townhouse since 1981. My neighbor is extremely loud and operates his business over eBay with much vehicular and foot traffic. I have had his customers knock on my door by mistake. Although we homeowners are not allowed by our conditions, covenants, and restrictions to have an active business with traffic, the property manager refuses to act. If I decide to sell my townhouse, must I disclose this neighbor as a "preexisting condition"?

-- Sandra B.

DEAR SANDRA: Have you politely talked with your neighbor about the noise? Maybe he isn't aware of the disturbances.

That happened to me a few months ago. My neighbor is a hard-working, extremely successful accountant who leaves home at 5:45 a.m.

Depending on his mood, he drives his noisy Ferrari or quieter Porsche. They're beautiful cars. But at that early hour, I really don't enjoy them waking me up.

One morning, when the noise seemed especially loud, I politely called him to ask if he could be quieter when he left for work each morning. He said he didn't realize the noise was so loud. Since then, I've slept blissfully as he drives quietly away.

In most communities, it is now legal to operate a home business, with some restrictions. Many cities even welcome home businesses as long as a business license is obtained (to generate tax revenue).

As for your disclosure of the neighbor's home business, if it is legal, it probably need not be disclosed to prospective buyers of your townhouse unless it is a neighborhood nuisance. If the disturbance has risen to the level of a nuisance, you and other neighbors should consider bringing a private nuisance-abatement lawsuit against the neighbor. Consult a lawyer for details.

DEAR BOB: My brother and I bought a beachfront condo as tenants in common. Our heirs will inherit half of the condo when one of us dies. However, we would like for the surviving brother to have the right of first refusal to buy the other half from his brother's heirs . In both of our situations, our heirs are adult children. Is there a way this can be done? -- Rex H.

DEAR REX: Your wish is easily possible, but your current method of holding title is dangerous. If one of you dies before the problem is fixed, you (or your brother) could wind up owning half of the condo with the late brother's children if they are specified heirs in the deceased co-owner's will.

Worse, those new co-owners could force a sale of the condo. It's called a partition lawsuit.

Consult an estate-planning lawyer. I suspect he or she will recommend holding title to the condo in a joint living trust where you both can express what you want to happen, such as that buyout arrangement, when one of you dies.

DEAR BOB: About a month ago, I heard a radio ad from a mortgage broker. He advertised no upfront cost, no appraisal fee, no this and that. I phoned him. Everything sounded good as I wanted to refinance to lower my home loan interest rate. I gave him all my income and expense information over the phone. He said I would have an answer within 24 hours. Although I did receive "loan approval" within 24 hours, it was for a different loan than we discussed. The mortgage broker's fax of his "good-faith estimate" of loan costs was much different than what we talked about. Without my approval, he unexpectedly sent an appraiser to my house. The appraiser wanted a $350 appraisal fee, which I paid in cash. The appraisal was much lower than my home's market value. I'm out the $350 fee for a bad appraisal and this mortgage broker threatens to sue me for his loan fee. What can I do? -- Juan P.

DEAR JUAN: Report the facts you stated to your state agency that regulates that mortgage broker, who should be put out of the mortgage business. As for your $350 appraisal fee, you could sue the appraiser in small-claims court for breach of contract or fraud if you can prove the appraisal was inaccurate based on recent home sales prices of comparable, nearby homes.

DEAR BOB: I own three rental houses and my personal residence. I want to leave them to my kids, but not in "share and share alike" amounts. Should I create a living trust for each property separately with a surviving beneficiary? Or can I have one living trust and include all four addresses, each with a different provision for who gets what? One child will need more financial help than the others. What do you suggest? -- Elly W.

DEAR ELLY: You can accomplish your goals with either one living trust to hold title to all your properties, or a separate living trust for each property. You can amend a living trust as often as you wish, such as when a living trust beneficiary has a personal situation that changes the desirability of an inheritance. There are so many advantages to a living trust in terms of flexibility, compared to holding title as "joint tenancy with right of survivorship," I can't begin to list them all.

DEAR BOB: I am the seller of an income-property duplex that was supposed to close on Friday. My instruction to the closing officer was to wire transfer the sale proceeds directly to my bond fund. But I was called about 2 p.m. that day and told that she had not yet received the loan proceeds and it would be too late to wire transfer, so it would have to wait until Monday. As a result of the closing delay, I lost three days of interest, which was about $400. The prorated rent received for those three days went to my buyer. Is this a common occurrence? Do I have a justified cause of action against the party that failed to transfer the funds on time? What would you advise? -- Jacob B.

DEAR JACOB: Wow! That must have been quite a sum of money you received to lose $400 interest for just three days. But don't be upset because your sale didn't close on schedule.

Frankly, it is a waste of your valuable time to argue about this modest amount. If the buyer's lender promised to deliver the mortgage funds on Friday, it appears that was done, although it was received too late to wire the money into your bond fund.

Generally, loan funds must be received from the lender the day before the property title transfer is recorded, usually early in the morning.

You presumably got the money wired into your bond fund on the following Monday. If I were in your situation, I would forget the issue. Next time, try to close your realty sale early in the week so, at worse, there is only a one- or two-day delay.

DEAR BOB: In regard to an Internal Revenue Code 1031 tax-deferred exchange, how long must the acquired property be rented to a tenant before I can move in and convert it to my personal residence? I get different answers, ranging from one year to six years.

-- Florence H.

DEAR FLORENCE: Internal Revenue Code 1031 does not specify any exact minimum rental time for the acquired property in a tax-deferred exchange.

Most tax advisers suggest at least six to 12 rental months to show rental intent at the time of the exchange. But waiting six years is totally unnecessary. Consult a tax adviser for details.

DEAR BOB: Five years ago, two of my daughters and I bought a house as "joint tenants with right of survivorship." Two years ago, one of my daughters moved out. She stopped paying her share of expenses. In October 2003, she signed a quitclaim deed, resigning her interest in the house to us. When I die, will the house go to my other daughter who lives with me in the house?

Could we sell the house now without the other daughter's approval? -- Ruth J.

DEAR RUTH: When a joint tenant signs a quitclaim deed, that means she gives up her interest in the property to the remaining joint tenants. The result is you and your other daughter now own the house as joint tenants with right of survivorship.

If you die first, your surviving daughter who now owns the house with you in joint tenancy will own the entire house as a surviving joint tenant. No probate proceedings will be required.

If you and your daughter want to sell the house, you can do so without the approval of the daughter who signed and presumably recorded the quitclaim deed. Consult a lawyer for details.

DEAR BOB: My husband and I bought a rental property some years ago. We only have seven years left on the mortgage payments. We are pondering selling. How will we be affected by capital gains taxes? Can we reinvest the equity earned and avoid the tax? -- Delmayne C.

DEAR DELMAYNE: Congratulations on your profitable rental property investment. You have probably enjoyed the depreciation tax shelter over many years.

The only way to avoid capital gains tax on the sale of your rental property is to make an Internal Revenue Code 1031 tax-deferred exchange for another property to be held for investment or use in a trade or business.

The acquired property cannot be your personal residence. However, you can later convert it into your personal residence. Most tax advisers suggest waiting six to 12 months to show rental intent at the time of the trade. But IRC 1031 doesn't specify any rule for minimum conversion time.

To qualify for a tax-deferred exchange, you must trade "equal or up" in both price and equity. That means you cannot take any cash (called "boot") out of the exchange.

However, if you want to receive nontaxable cash from your equity, you can refinance either the old property well before the exchange or the new property after the exchange is completed.

In your situation, you can sell the old rental property, have the sales proceeds held by a qualified third-party intermediary beyond your constructive receipt, and then use that cash to buy the qualifying replacement property.

After selling your current rental property, you have 45 days to designate the replacement property and up to 180 days to complete the acquisition. This is called a "Starker exchange." Full details are available from a tax adviser.

DEAR BOB: We bought our condo in 2002. Our mortgage has a fixed interest rate of 5.25 percent. But we missed a great opportunity to refinance at 4.25 percent in March 2004. That simple action would have decreased our monthly payment by $200. I haven't slept well since then. We need to lower our mortgage payment. But the only option seems to be an adjustable-rate mortgage (ARM) at 3.75 percent. However, the lender warns the interest rate can change slightly from month to month. How risky is this? -- Susana N.

DEAR SUSANA: You have an excellent fixed-rate home loan at 5.25 percent, which cannot be matched in today's financial market. That adjustable loan might sound good. But it is risky because interest rates seem headed up.

If you do refinance with an ARM, be sure it has a slow-moving index, such as the lender's cost of funds index. In my opinion, just to save $200 per month for a few months, it's not worth the risk of giving up your great mortgage to switch to a high-risk ARM.

DEAR BOB: I am a widower, age 78. I am comfortable with a military pension and Social Security. My home is debt-free, but my health is declining and I am worried about potential future medical care. Last year, a friend obtained a reverse mortgage and used the money to buy a lifetime medical care policy. Just a few months ago, her health declined and she had to be moved to a care facility. I'm worried that might happen to me. Although I am in excellent health for my age, if I get one of those reverse mortgages, what happens to my home after I die? Does the bank own it? -- Raymond J.

DEAR RAYMOND: There are many misunderstandings about reverse mortgages for senior citizens. Your situation seems like a perfect situation for one of these superb tax-free mortgages.

You can select among lifetime monthly income payments, a lump sum (such as to pay for expenses such as a new roof or to buy a lifetime care insurance policy), and a credit line (the most popular choice, but not available in Texas).

After you die, your home passes according to the terms of your will or living trust. Contrary to popular belief, the reverse-mortgage lender does not own your house after you die.

When you pass on, after the reverse-mortgage balance is paid off, the remaining equity goes to your heirs.

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

{copy} 2004, Inman News Service