QDEAR BOB: My husband and I, at ages 56 and 58, plan to retire in a few years. What is the best way to hold title to our home?

We hold title as joint tenants with right of survivorship, but you recently got us worried about what would happen if we both died at the same time, such as in a plane crash. Neither of us has a will and we have two adult children who are our heirs. As we take four or five air trips together each year, what would happen to our house and two rental houses if we die at the same time? -- Vivian R.

ADEAR VIVIAN: As you probably know, when a joint-tenant real estate owner dies, the surviving joint tenant automatically receives title without probate. In most states, all that is required is for the surviving joint tenant to record a certified copy of the death certificate and an affidavit of survivorship with the county recorder.

However, when all joint tenant co-owners die at the same time, such as in a plane crash, their joint tenancy property shares are probated according to the terms of their individual written wills. In most states, that means their assets must go through probate court costs and delays. (Some states have exceptions for small estates and primary residences).

Everybody needs a written will -- be sure to tell friends and relatives where to find yours. Don't put your wills in your bank safe deposit box, which might be inaccessible to heirs after your death.

In addition to simultaneous death, there are other joint-tenancy pitfalls. For example, suppose you or your husband contracts Alzheimer's disease or has a severe stroke. The other spouse might need to sell the joint-tenancy house. The signatures of both spouses are usually required. A power of attorney might not be sufficient.

A far better alternative is a joint living trust, or two living trusts, depending on what your lawyer advises. If a living trust co-owner becomes incapacitated, the other can take over the living trust assets to sell, refinance, rent or do whatever is necessary.

If both living trust co-owners die at the same time, the named successor trustee distributes the living trust assets according to the provisions of the living trust without the need for probate.

DEAR BOB: Effective Oct. 22, President Bush signed into law an important change to Internal Revenue Code 1031 for tax-deferred exchanges.

As I understand it, when an investor trades into a rental residence that eventually becomes the investor's home, Internal Revenue Code 121(d) now requires at least five years of ownership, with at least two years of principal residence occupancy, before becoming eligible for the $250,000 (or $500,000 for a married couple) home sale tax exemption.

Is this the way you understand the new change? -- George C.

DEAR GEORGE: Yes. Many real estate investors have big capital gains in their investment or business properties. If they sell, they will owe 15 percent federal capital gain tax, plus any state tax.

However, this tax can be avoided by a tax-deferred exchange trade up for another investment or business property of equal or greater cost and equity. Many investors trade for a rental house that will eventually become their principal residence, which is eligible for the IRC 121 tax exemption.

The change requires at least five years of ownership before sale of such a principal residence acquired in a tax-deferred exchange. Of course, the property must be a rental at the time of acquisition, to show rental intent. If it is sold in less than five years, the deferred capital gain from the exchange becomes fully taxable. More details are available from your tax adviser.

DEAR BOB: I bought my condo in 2002 when I was single, but now I am engaged to marry. The condo has appreciated about $200,000 in market value. After we marry, will our tax-exempt amount remain at $250,000 or will we then qualify for the $500,000 exemption?

-- Daniel M.

DEAR DANIEL: It you sell it now, thanks to your $250,000 principal residence tax exemption from Internal Revenue Code 121, it makes your sale profit tax-free after 24 months of ownership. But I presume you and your wife plan to live in your condo, hoping it will continue to increase in value.

After your wife has occupied the condo with you at least 24 months, if you decide to sell, then up to $500,000 of the principal residence sale profits will be tax-free. Only one spouse's name need be on the title if a joint tax return is filed in the year of the principal residence sale.

DEAR BOB: I own a condo in a complex of 220 units, and 49 percent are rentals. Our monthly association fees are $185, but the association has little in reserves.

What are the average monthly condo association fees and what is recommended for an association to keep in reserves? Should the conditions, covenants and restrictions state a maximum occupancy for each unit to avoid the complex deteriorating more? -- Kearney K.

DEAR KEARNEY: With 49 percent rentals, the situation is not good. Most mortgage lenders will refuse to make new loans in your complex, and the few that will do so will charge higher-than-market interest rates. The result is difficulty selling condos in that complex, but most condo CC&Rs say nothing about maximum occupancy.

Your monthly fees of $185 are low. Of course, condo association fees vary according to what is included. Maintenance of common areas is always included, but there might be included utilities, usually at least water.

For example, I own a two-bedroom second-home condo in Minnesota where my monthly condo fee of $298 includes heat. Winter heat is a big deal in Minnesota. Our dues have been raised 5 percent each year for the last few years to increase our reserves because our building is about 25 years old. We only have three renters out of 63 units.

As a general rule, condo replacement reserves should be at least $1,000 per unit; $2,000 or $3,000 per unit is much better, depending on the building age.

DEAR BOB: Recently you answered a question from two sisters who inherited their parents' home, which had been bought many years ago at a low price. You said they would not owe any capital gains tax if they decide to sell. Why?

-- Carolyn H.

DEAR CAROLYN: When an heir receives title to inherited and appreciated real estate (or other assets, such as common stocks), the heir receives title with a new stepped-up basis of market value on the date of the decedent's death (or alternate date used by the estate).

If the decedent died in 2004 and left a net estate of less than $1.5 million, no federal estate tax is due.

The heirs received the inherited property at today's market value. Little or no capital gains tax is due if they sell it shortly after inheriting it. Consult a tax adviser for details.

DEAR BOB: I recently bought a condo with only myself on the title. How can I get my fiancee on the titleto enable her to take advantage of the tax deductions? If she pays half the mortgage, I think this is only fair. Will check stubs for half the payment suffice, or will I have to claim the full amount and reimburse her at tax time? -- Christian L.

DEAR CHRISTIAN: Let me get the facts straight. You bought a condo in your name alone. But your fiancee is making half the mortgage payments. Are you and she both living in the condo? How far away is the wedding date? The answers determine your tax status for deductions.

If this is a rental condo and neither of you live in it, only you can deduct the investment mortgage interest, property taxes, condo fees, insurance, etc. because only your name is on the title. Your fiancee would be a fool to pay half the expenses in such a situation.

Presuming you have a smart fiancee, I presume you are living in the condo and she also either lives there or plans to do so after the wedding. If you are not yet married and her name is not on the title, she is not entitled to any tax deductions she pays for your condo. The reason is she has no legal obligation to pay those expenses.

To entitle your fiancee to her half of the tax deductions for the condo mortgage interest and property taxes she pays, she must be on the title. You can sign a quitclaim deed to her for a 50 percent interest and record that deed to accomplish this requirement.

After you marry, presuming you file a joint income tax return, if she pays half the mortgage and property tax payments, her half of the payments become tax deductible even if her name is not on the title.

DEAR BOB: If I sell an investment property I have owned for less than a year, can I take advantage of tax rule 1031 and trade up to another higher value property without paying capital gains tax on my profit?

-- Shawne R.

DEAR SHAWNE: Yes. Internal Revenue Code 1031 has no minimum ownership time for a property to be traded up into another qualifying investment or business property of equal or greater cost and equity. However, if you take out any "boot," such as cash or net mortgage relief from the trade-up, that amount will be taxable.

Theoretically, you can make a tax-deferred trade-up in both equity and market value every day because IRC 1031 specifies no minimum holding time. As far as the tax law is concerned, a tax-deferred exchange is a continuous investment.

DEAR BOB: We bought a condo on July 30. About three weeks later, we learned the condo association is involved in a lawsuit that was never disclosed to us before buying. The conditions, covenants and restrictions and condo association meeting minutes were not delivered to us until Sept. 23. We now know the condo seller, his partner and the listing agent all knew about the lawsuit, which was filed by one of the sellers who is also on the association board of directors. We are uncertain what the lawsuit is about.

Do we have any recourse? -- Christina S.

DEAR CHRISTINA: Your situation shows why it is so important before the purchase for condo buyers to obtain copies of the CC&Rs and at least the last six months' condo association meeting minutes.

Have you thought of asking the seller and the listing agent what the lawsuit is about? Maybe it is about something that won't affect your condo's market value.

At the least, the lawsuit should have been disclosed to you in writing by both the seller and the listing real estate agent because it is a material fact affecting market value. Consult a lawyer who is familiar with condominium law.

DEAR BOB: My neighbor recently died. She had told me her will leaves her assets to her nephews, now ages 14 and 17. They are great boys who looked after her when her husband died a few years ago. I know their parents slightly as they often dropped off the boys, who helped with chores around the house and enjoyed spending weekends with their aunt, especially because she was a great cook and had a swimming pool.

My question is what happens when minor children inherit real estate? I would like to buy the house from them at market value, just to control who lives next door.

-- Lucy T.

DEAR LUCY: Minors, younger than 18, can inherit real estate, but they can't convey it. Presuming your neighbor's estate goes through probate court, title will eventually vest in the names of those minor children. Meanwhile, I hope their parents make sure the property is maintained, and the property taxes, insurance, and mortgage payments (if any) are paid.

The situation you describe shows why it is so important for well-meaning property owners not to will real estate to minor children.

Because you want to buy the adjoining house, this would be a suitable time to contact the parents of the minor heirs to express your purchase interest. If you all agree on a sale price, after the title vests in the minors, the parents will need to petition the local court to have a guardian appointed to represent the minor's interests in the sale.

Consult a probate lawyer for details.

DEAR BOB: I was divorced 11 years ago but my wife and I remain friends. The divorce agreement provided that she would live in our house with our three children until the youngest became 18. The youngest is now 22. My ex-wife has finally realized it is time to sell our house, which has greatly appreciated in market value. Our net sales profit will be about $400,000. As I recall, some time ago didn't you say there is a special tax rule for ex-husbands like me who now don't live in their principal residence where they formerly lived?

-- William R.

DEAR WILLIAM: Internal Revenue Code 121 provides for divorce situations like yours. If your ex-wife, who is living in your former principal residence, meets the two out of last five years ownership and occupancy tests of IRC 121, as her ex-husband and co-owner of that property, you also qualify.

This is known as the "in spouse" and "out spouse" tax rule. If your ex-spouse co-owner qualifies for up to $250,000 tax-free principal residence sale profit, you also can qualify for up to $250,000 tax-free profits

Consult a tax adviser for details.

DEAR BOB: About four years ago, I added my only child, a 24-year old son, to the title of my home as a joint tenant. I thought this was smart so probate can be avoided after I die. However, he got involved in a lawsuit, which he lost, and now has a $225,000 judgment against him. The plaintiff's lawyer threatens to attach my house and force its sale to pay this judgment. Can this be done? -- Alicia H.

DEAR ALICIA: Discuss your situation with a real estate lawyer. Because your son owns a half interest in your home, his judgment creditor might be able to attach that interest.

However, in most states there are statutes prohibiting judgment lien forced sales of co-owned property.

This circumstance shows why co-owners should be aware of the possible adverse legal consequences when adding heirs to their property titles.

DEAR BOB: I am in this real estate deal with my girlfriend. We bought this house last year thinking we were going to get married. However, things are not going well. I want out of the deal. What can I do? I heard something about partition. Is this true? -- Moises C.

DEAR MOISES: A partition lawsuit is available for joint tenant and tenant-in-common co-owners in most states.

That means you file a partition lawsuit against your co-owner asking the court to order a sale of the property with the sales proceeds divided among the co-owners.

Unless there is a compelling reason for the judge not to order a partition sale of the jointly owned property, the court will order the property sold. Consult a lawyer for details.

DEAR BOB: Last year, my husband and I bought a house in Alabama for our son and his wife. At the time, they were having job and credit problems. He now has a good job. We are thinking of using a quitclaim deed to transfer the mortgage to them. Is this a good idea?

-- Jean E.

DEAR JEAN: You can transfer the title by a quitclaim deed to your son and his wife. But you cannot transfer the mortgage obligation without the lender's approval.

Technically, when a title transfer occurs, the mortgage lender could enforce the due-on- sale clause to call the mortgage due in full. But most mortgage lenders won't do so if the monthly payments are paid on time.

If your son and daughter-in-law are not on the title, to make their monthly mortgage interest and property tax payments tax-deductible, their names must be added to the title. You can do this with a quitclaim deed. However, if you give up all ownership in the house, the lender might enforce the due-on-sale clause.

For more details, consult an Alabama real estate lawyer.

DEAR BOB: My husband and I live in a luxury mobile-home estate community. We lease our lot for our free-and-clear mobile home.

When I recently inquired about a reverse mortgage from the local Wells Fargo representative, I was told that mobile homes are not eligible for senior citizen reverse mortgages. I thought you said mobile homes are eligible. -- Marcia I.

DEAR MARCIA: Perhaps you confused my statement that manufactured homes on foundations on separate lots are eligible for senior citizen reverse mortgages with your situation. If you don't own the land beneath your mobile home and it is not on a foundation, it is not eligible for a reverse mortgage.

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