QDEAR BOB: Attached are several articles you wrote in 2001 and 2002 about the Internal Revenue Code 121 $250,000 principal-residence-sale tax exemption (up to $500,000 for a married couple filing jointly). Is that tax law still in effect? My husband and I spend six months each year in our Florida home and six months annually in our other home, which we recently sold. We filed for a Florida homestead exemption to save on property taxes. Our accountant says that because tax law changes occur all the time, we should check to see if we qualify for the IRC 121 tax exemption. Since we meet the ownership and occupancy tests for the home we sold, do we qualify for the $500,000 exemption? -- Joan H.

ADEAR JOAN: Internal Revenue Code 121, enacted by Congress in 1997, is alive and well and there are no proposed plans in Congress to change it. In fact, the IRS recently announced new regulations clarifying exceptions for home sellers who only partially meet the two-out-of-last-five-years principal-residence ownership and occupancy tests.

Because you occupied the house that you sold at least six months each year, that is aggregate occupancy time of 30 months in the last five years, so you meet the two-year time test.

However, if I were an IRS auditor, I would inquire if the home you sold was really your principal residence (as required by IRC 121) or if it was a secondary home. The fact that you filed for a Florida homestead exemption indicates that the home in Florida is your principal residence.

Other indications of your principal residence include where you vote, your bank account location, where you are employed, the address on your driver's license, and your car registration location. Also, did you file income taxes in the state where you sold your home?

So far, we only have one court decision interpreting this aspect of IRC 121. It is Guinan v. U.S. (2003-1 USTC 50475). In that case, the taxpayers sold their Wisconsin home and paid capital gain tax. Then they sued the IRS for a tax refund. The IRS fought hard. The U.S. District Court ruled the Wisconsin home was not the taxpayers' principal residence, primarily because they didn't file their income taxes there.

DEAR BOB: Thanks for your recent item about getting a reverse mortgage in a condo complex where there is a high percentage of renters. I had the same problem. Our condo complex has no rules against renters, and more than 40 percent of the condos are now rented. The result is sellers have a tough time selling because mortgage lenders either won't make a loan to the buyer or the interest rate is high. However, I am 68 and I like my condo; I plan to stay permanently. I had trouble getting a reverse mortgage. Then I met a reverse-mortgage specialist who got me a Federal Housing Administration reverse mortgage. You might suggest that reverse-mortgage borrowers try FHA if they have difficulty getting a reverse mortgage. -- Ethel W.

DEAR ETHEL: Thank you for sharing that information.

DEAR BOB: The sale of my home was supposed to close on June 29. But it still hasn't closed because the buyer is having difficulty clearing up his credit report so he can get a mortgage. His mortgage broker says the problem is almost resolved. But I've been hearing that almost since the sales contract was signed on May 28. How long do I have to wait to declare my buyer in default so I can sell to the backup buyer who has been patiently waiting? My real estate agent advises me to act now. -- Rolf R.

DEAR ROLF: You have a smart agent. Most real estate lawyers would advise you to wait "a reasonable time" after the scheduled closing date before declaring your first buyer in default and refunding his earnest money deposit.

Especially since you have a waiting backup buyer, in my opinion you have waited far longer than a reasonable time.

If you are certain your backup buyer is ready to quickly close the sale, I wouldn't wait any longer to refund the first buyer's money and cancel that sale for breach of contract. Consult a lawyer for details.

DEAR BOB: I was a do-it-yourself home seller who thought he could save the 6 percent sales commission. On my home, that's about $21,000. But I soon learned how much work is involved in selling alone. Of course, several realty agents hounded me to list with them. But I resisted. Then one persistent, but astute, agent suggested an "exclusive agency" listing. I could still try to sell my home on my own without any commission, but after I signed the 90-day exclusive agency listing at 6 percent sales commission, she put my listing into the local multiple listing service and on the Internet. She told me most realty agents don't take exclusive agency listings but that she loves them and has never had a seller find a buyer on his own. The happy result for me was I sold my home and netted more than if I had sold without an agent. Why don't you write about exclusive agency listings? -- Brent C.

DEAR BRENT: Shame on me. The reason I rarely mention exclusive agency listings is because most real estate agents refuse to accept them. You obviously had a savvy agent who had confidence she could find a buyer before you did, using the MLS and the Internet. She was right.

DEAR BOB: I just thought you should know about a type of home loan called a "stated-income mortgage" for home buyers. As a self-employed manufacturer's representative for several companies, my income varies wildly from year to year and even month to month. But my FICO score is 724, so you know my credit is good. My wife is expecting our first child, so I knew I had to do something to get us out of our apartment. The real estate agent who showed us houses told us about stated-income mortgages. Although we paid 1/8-percentage point higher interest than if I had a wage slave job, we had no trouble getting a mortgage and buying our first home, even with only a 10 percent down payment. -- James L.

DEAR JAMES: Almost every mortgage lender has offered stated-income or low documentation home loans to borrowers with good credit for many years. You are correct; I shouldn't presume everyone knows about these great mortgages, which are only slightly more expensive that full-documentation home loans.

DEAR BOB: Thank you for advising homeowners to raise their insurance deductibles to save big bucks. After my neighbor told me his homeowner insurer wouldn't renew his policy because he had three claims last year (total about $5,600), when I got my huge homeowner insurance bill last month, I talked with my insurance agent about it. She said that even though I haven't had any claims, my low $250 deductible causes my home insurance premiums to be high. She suggested raising my deductible as high as we can afford. To help us decide, she gave us the premiums at $500, $1,000, $1,500 and $2,000 deductibles. Because we always have well over $2,000 in savings, my wife and I selected the $2,000 deductible. As a result, we will have to pay any small losses but we saved about $340 on our annual premium. -- Sam H.

DEAR SAM: You're welcome. And thank you for letting us know homeowners can raise their deductibles up to $2,000, thus saving money and minimizing their possibility of non-renewal for filing too many claims. When my homeower insurance comes up for renewal in a few months, I'll do as you did and raise my deductible to $2,000.

DEAR BOB: I just bought my first home, a condominium, but I feel as if I was taken by my real estate agent. I stopped by a Sunday afternoon open house being held by the listing agent. The condo was exactly what I had been searching for. Great location. Nice complex about six years old. Affordable price. The agent was helpful. Even though I was a bit light on my cash down payment, she arranged a mortgage I can afford. What really bugged me was, at the closing, the listing agent tacked on a $695 "administrative fee" to my closing costs. She didn't even show up for the closing. I was told, "Either sign the papers or you don't get the condo." I reluctantly signed. Because the listing agent got all the sales commission -- I didn't have my own buyer's agent -- it seemed outrageous to charge me $695 extra. When I called the agent, she said that is "standard" to pay for her brokerage's expenses, including the services of a "transaction coordinator" who, I admit, was helpful. What is your opinion?

-- Silvia H.

DEAR SILVIA: If you were never informed of that $695 administrative fee and did not previously agree to pay it, as a buyer you are not obligated to pay.

You should now write a polite demand letter for refund of the $695 by that listing agent within 10 days (send a separate copy to the brokerage office manager).

If you don't receive a check within 10 days, your next stop should be the local smal- claims court to file a breach-of-contract action for the $695.

You are correct that a home buyer should not be asked to pay the listing agent's $695 administrative fee on top of the sales commission the seller paid to her. The fact that listing agent didn't have to split her commission with a buyer's agent makes that $695 fee all the more outrageous.

DEAR BOB: My wife and I would like to sell our rental duplex. It is worth about $400,000. We want to sell and give each of our daughters half of the proceeds so they can buy their own homes. What is the best way to sell and avoid tax? -- George A.

DEAR GEORGE: A major drawback of selling investment property for cash is that your capital gain is fully taxable. But the good news is the maximum federal capital gain tax rate is now only 15 percent, plus any state income tax where the investment property is located.

If you want to fully avoid tax on the sale of investment property, the only way to do so is to make an Internal Revenue Code 1031 tax-deferred exchange for another investment or business property of equal or greater cost. However, that doesn't seem to be what you want to do.

Another alternative to consider would be to refinance the duplex to produce tax-free cash to give to your daughters for their down payments. You will still own the duplex and your tenants will be making your mortgage payments for you.

DEAR BOB: My mother died about 16 years ago without a will. I am her only living child. My younger brother died several years ago in a motorcycle crash. Mother always wanted me to have her house after she died. My brother had received some bank accounts held in joint tenancy with her. We never had any problem about dividing her estate. I have been living in the house with my husband for the last 16 years. Now we want to sell it. But the title is still in my mother's name. There were never any court proceedings. The real estate agent I talked with about listing my house for sale says she can't take the listing until I get title in my name. What should I do? -- Stevan H.

DEAR STEVAN: Consult a lawyer who specializes in probate law. It will probably be necessary to probate what is left of your late mother's estate, namely the house, to transfer title by intestate succession into your name. The fact that your brother is deceased might complicate matters, especially if he left any children.

Your situation shows why it is so important to promptly probate estates. Over the years, I've heard about many situations like yours in which estates aren't properly probated until many years after the deceased died. Then the situation gets more complicated and expensive, as in your circumstance, before real estate titles can be conveyed.

DEAR BOB: We are remodeling our home. It is nearing completion. We spent about $85,000 on the remodeling, borrowed on our home-equity line of credit. When we eventually sell our home, how will this affect our tax situation?

-- Bill W.

DEAR BILL: Save your home improvement receipts. The total cost is a capital improvement, which should be added to your adjusted cost basis.

To illustrate, suppose you paid $200,000 for your home and you spent $85,000 remodeling. Now your basis is $285,000. If you someday sell the house for, let's say, $400,000, then your capital gain is the $115,000 difference.

Of course, Internal Revenue Code 121 provides a generous $250,000 principal-residence-sale tax exemption (up to $500,000 for a qualified married couple filing jointly) if you own and occupy the home an aggregate two of the five years before its sale. The happy result is all your sale profit will probably be tax-free.

DEAR BOB: I have run up about $45,000 in credit card and car loan bills. The interest rates on the credit cards are more than 18 percent. The car loan is at 4.3 percent. I recently took out a $60,000 home-equity credit line offered by my bank. It is at the prime rate, which is 4.25 percent as I write to you. Should I use this credit line to pay off my credit cards and the car loan? -- Suzanna S.

DEAR SUZANNA: Pay them both off with your home-equity credit line. The reasons are you will dramatically reduce the interest rate on those credit card loans and also make your non-deductible auto loan interest tax-deductible.

However, to eventually pay off that $45,000 total, make more than the minimum interest-only monthly payment on your home-equity loan. Home-equity credit lines are wonderful finance cushions, as in situations such as yours in which you want to consolidate debt.

DEAR BOB: My adult daughter moved into my house with my grandson about three years ago after her nasty divorce. She sweet-talked me into putting her name on the title to my house as joint tenants with right of survivorship. Then we had a falling out about a year ago. I told her to get out, although I disliked seeing my wonderful grandson move out, too. They moved. Now I want to sell my house. But I can't do so because she is still on the recorded title. When I asked her to sign a quitclaim deed my lawyer prepared, she said she would sign only when she gets half of the sales proceeds. My lawyer says there is nothing I can do. Do I have any legal recourse? -- Dad.

DEAR DAD: Now you know why I constantly remind parents not to add their heirs to their real estate titles. A far better alternative would have been to put your home's title into your living trust, which can be easily changed to disinherit your heirs.

However, you can bring a partition lawsuit against your daughter to force the sale of the joint tenancy property. But then your daughter will be entitled to receive half of the sales proceeds. Sorry, I don't know any other solution.

DEAR BOB: When our father passed away, my sister and I inherited about $300,000, plus a house we sold for $270,000. According to my knowledge of the tax law, as long as an estate is below $650,000, we owe no inheritance tax. But what type of tax will be due on the $270,000 real estate portion? My sister says we will receive a Tax Form K for the next year's taxes. Is this correct? -- Vincent M.

DEAR VINCENT: Although you didn't give the year of your father's death, if he died in 2000 or 2001, the federal estate tax exemption was for total assets up to $675,000. If he died in 2002 or 2003, the federal exemption increased to $1 million. If he passed on in 2004, the exemption is $1.5 million. Therefore, his $570,000 estate is exempt.

However, if your late father was a resident in one of the few states that still have an inheritance tax on heirs, there might be a state inheritance tax.

Those states are Connecticut, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Hampshire and New Jersey. If he resided in one of those states, check with state inheritance tax officials to see if any state inheritance tax will be due.

DEAR BOB: My divorce settlement in 1990 entitled me to receive the house. But my ex-husband has been living with me for the past six years. We file income taxes separately. Is there an "in spouse" and "out spouse" tax law that allows me to claim $500,000 tax exemption when I sell, rather than just $250,000? We both meet the two-out-of-last-

five-years occupancy test.

-- Elenor B.

DEAR ELENOR: You win the nice-try award. But you can only claim up to a $250,000 tax exemption. If your ex-husband is still on the title, he can also claim up to a $250,000 exemption under Internal Revenue Code 121. But there is no way you, individually, can claim up to $500,000. In other words, you cannot transfer your ex-husband's $250,000 entitlement to you. Consult a tax adviser for details.

DEAR BOB: I am interested in getting more information about those reverse mortgages. Which are the lenders? Is it safe and what are the interest rates? -- Hilppa M.

DEAR HILPPA: To qualify, you must be a house or condominium owner at least age 62. There are three nationwide reverse mortgage lenders: Federal Housing Administration (FHA), Fannie Mae and Financial Freedom Senior Funding Corp. The terms of each lender are different.

FHA is the most popular plan with the lowest interest rates. But the FHA loan limit is also the lowest. Fannie Mae currently offers reverse mortgages up to $333,700 (which will increase after Jan. 1, 2005). Financial Freedom Plan has no maximum loan limit, but offers the most flexible plans and the highest interest rate.

More details and names of local lenders in your area are available on the Internet at www.reversemortgage.org.

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