QDEAR BOB: Thank you for your advice that home buyers make their purchase offers contingent on a satisfactory professional inspection report. We bought a older house in a great neighborhood, and the seller and realty agent provided a written seller disclosure statement, which didn't reveal any serious problems.

Our professional home inspector found several undisclosed serious defects the seller must have known about. The inspector discovered attic rafters that showed water stains, indicating a leaky roof, and also noticed fresh landscaping on a hillside. Neighbors later told us the soil was unstable and had slid about 10 months earlier. When confronted with our professional inspector's report, the sellers readily agreed to a $30,000 repair credit. We got a top-quality roof installed for $14,000 and a soil engineer assured us that a few French drains will solve the drainage problem for about $5,000. What shocked us was that our buyer's agent discouraged us from obtaining an inspection. Is this common? -- Frank W.

ADEAR FRANK: Most real estate agents, especially buyer's agents, encourage their buyers to make their purchase offers contingent on a satisfactory professional inspection. Their primary motivation is they want to avoid after-sale lawsuits for undisclosed defects.

Out of fairness to your home seller, perhaps the attic roof leaks had not yet become obvious if there was no water evident within the living area. But the seller should have disclosed the hill slide and any corrective action that was taken. Covering up a hill slide with new landscaping won't solve a drainage problem.

DEAR BOB: An article in another newspaper said there is no five-year home ownership rule to qualify for the $250,000 tax exemption that you often mention. Is that writer correct that a homeowner must live in the residence only two years?

-- Cecilia N.

DEAR CECILIA: Internal Revenue Code 121 says that to qualify for the principal residence sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly) the seller must have owned and occupied their home an "aggregate" 24 of the 60 months before its sale. The occupancy time need not be continuous.

If you bought your principal residence as recently as 24 months ago, and you occupied it those 24 months as your main home, you qualify for up to $250,000 (or $500,000) tax-free sale profits.

However, confusion arises if you acquired your principal residence in an Internal Revenue Code 1031 tax-deferred "like kind" exchange and you later converted it from a rental into your principal residence.

For any such principal residence sale after Oct. 22, 2004, IRC 121 requires at least 60 months of ownership (but only 24 months of residence occupancy) to qualify for the $250,000 or $500,000 exemption. Consult a tax adviser for details.

DEAR BOB: You recently had several items about stepped-up basis for inherited property. Does the same tax rule apply if I give a rental house to my single daughter where she can live with her son? The house is now worth about $275,000, but it cost my late husband and me about $35,000. If I give the house to my daughter, will she have a $275,000 basis? -- Sally R.

DEAR SALLY: No. The stepped-up basis rule only applies to inherited assets. It does not apply to lifetime gifts.

If you give that rental house to your daughter, she will take over your low $35,000 adjusted cost basis, probably even lower because of depreciation deductions. Your situation is a classic example why I often say it is better to inherit real estate than to receive it as a lifetime gift.

DEAR BOB: Is there a stepped-up basis on a property after a divorce? My former husband and I had our home built in 1972. We divorced in 1984 and I got his quit-claim deed for the home. I would now like to sell. The home has appreciated so much I am hoping the stepped-up basis rule applies to my situation. -- Peggy K.

DEAR PEGGY: The stepped-up basis rule only applies to property inherited from a decedent. It does not apply to a property title transferred as part of a divorce.

DEAR BOB: My husband died about three years ago and he left me a life estate in his house, which he owned before we married. My lawyer told me I must pay the insurance, property taxes and repairs. When I die, the house passes to my late husband's son, who now wants me to pass on or vacate the house. I have no intent to do either. Is there anything he can do to force me out? -- Alicia R.

DEAR ALICIA: As long as you behave, and pay the insurance, property taxes and repairs (presuming there is no mortgage), there is nothing the son can do to force you to prematurely vacate your home. Your lawyer appears to be giving you good advice.

DEAR BOB: In 1987 my wife and I bought a two-bedroom condo in an upscale complex. We lived there together until 1999 when she died. The next year, I decided to move to an assisted-living retirement home. My son rented my condo to a couple who have lived there for five years. Their rent pays my living expenses. Now the condo association wants to prohibit rentals. They say renters cause too many problems and restrict buyers from obtaining mortgages on favorable terms. I can understand that, but don't I have any rights as a responsible landlord with well-behaved tenants? -- Glenn W.

DEAR GLENN: Yes. I am familiar with a similar situation, as the condo association where I own a second home recently enacted a similar rental restriction. Upon the advice of our savvy condo lawyer, the condo board of directors stated in the covenants, conditions and restrictions (CC&R) amendment that the four existing rentals (out of 63 units) would be "grandfathered" to allow continued rentals.

That wise decision stifled any opposition. The "no rental" amendment then passed by a huge majority of the condo owners.

The CC&R amendment, however, allows our board of directors to approve 12-month rental "exceptions" such as when a condo owner vacates but plans to return, perhaps due to a health situation.

I suggest you consult the condo association's lawyer to suggest the proposal be amended to allow a grandfather provision for existing condo rentals.

DEAR BOB: We own a small vacation cabin, which is worth about $180,000. We bought it in 1995 for only $80,000. This is a vacation home, which we do not rent out. We are thinking of selling it and buying a mobile home for about the same price. I understand there will be no capital gains tax unless the mobile home is priced lower than the selling price of our cabin. Correct?

-- Dianne C.

DEAR DIANNE: Wrong! Who gave you that horrible tax information? He or she is completely mistaken.

Your vacation home sale $100,000 capital gain does not qualify for any special tax exemption. It will be taxable at the current federal capital gain 15 percent tax rate, plus any state tax.

The fact you want to buy a mobile home is irrelevant. Consult a tax adviser for details.

DEAR BOB: I am 72 and have been looking into a senior citizens reverse mortgage. My survivor's pension was recently cut by $1,300 per month by my late husband's employer, and there is nothing I can do. A speaker at the local senior citizens center explained reverse mortgages. They sound pretty good. I can receive $762 per month lifetime in my situation. That will greatly help. However, my mother and father lived to 86 and 94. If I live too long, will my son and daughter have to pay if my reverse mortgage balance exceeds my home's value when I die? -- Victoria R.

DEAR VICTORIA: No. Senior citizen reverse mortgages are non-recourse. That means your home is the reverse mortgage lender's only security for repayment. If you live to 120, the lender's sole recourse is to sell your home after you die.

If the reverse mortgage balance exceeds the home's market value when you die, too bad for the lender. However, as usually happens, after the owner's death and the home is sold, the excess proceeds go to the heirs.

DEAR BOB: I was intrigued by the recent item in your column where two brothers own a property but the mortgage lender advised refinancing in only one brother's name because the other brother had bad credit. You said each brother can claim his share of mortgage interest actually paid. Is there an IRS ruling on this issue? I have a similar situation, but when I contacted the IRS they told me if my name is not on the mortgage I cannot deduct the interest paid. -- Victor M.

DEAR VICTOR: Don't rely on information you receive from the IRS. Although the IRS agents do their best, survey statistics show they are often mistaken. Nobody can know the answer to every tax question.

If your name is on the title to a property, you are legally obligated to make all mortgage payments. Should you fail to pay, you could lose the property by foreclosure.

The property owner's name need not be on the mortgage obligation to be entitled to deduct the mortgage interest actually paid. Millions of homeowners have bought their property on land contracts for deed or "subject to" an existing mortgage without formally assuming it. They are "equitable owners" entitled to the interest deductions.

DEAR BOB: I'm a landlord. Although I have a "no pet rule," I knew I had to allow service dogs for handicapped tenants. A nice young man who claimed to be handicapped said he had a "service dog" to help with his mental condition. He showed me some paperwork. It was fake. I foolishly rented him a garden apartment with a fenced patio. The neighbors soon informed me he had a pit bull and was running a "puppy mill" with another dog. He paid the rent on time but refused to allow me to inspect. After noisy barking, and the neighboring tenant moving out, I hired a lawyer to evict my so-called "handicapped tenant." It cost me $2,400 in attorney fees and payment to the tenant to move out. As a sympathetic landlord, what could I have done to prevent this?

-- Robert N.

DEAR ROBERT: Did you check references of the applicant's two previous landlords? That's what I do. The current landlord might lie to get rid of a bad tenant. But the previous landlord will usually tell the truth.

Few tenants abuse the Americans with Disabilities Act. But a few do. Your tenant was obviously not handicapped and was running a pit bull breeding operation.

DEAR BOB: I am 68 and am interested in a reverse mortgage. But I have bad credit. I am trying to pay my bills on time. Do I have to wait until my credit report improves? -- Theresa J.

DEAR THERESA: No. Your credit rating has nothing to do with obtaining a reverse mortgage. Also, you don't need to be employed. But you do need to be a homeowner at least age 62 with a small or no mortgage.

DEAR BOB: Last weekend, with the help of my buyer's agent, I made a full-price purchase offer with no contingencies on a home listed for sale with another agent. One day later, the listing agent informed my buyer's agent the sellers want to wait 10 days to see other offers. There was nothing in the multiple-listing service about this. What is going on? I am upset. If the seller wants an above-asking price, why not just list the home at a higher price? Is this practice legal? Is it ethical? Mine was the only offer at the time. -- Deborah C.

DEAR DEBORAH: You were a victim of "offer shopping." It was unethical of the listing agent not to specify the 10-day bid opening date on the listing your buyer's agent relied upon.

If your purchase offer had a customary 24-hour expiration, unless the seller accepted your offer within your deadline, your offer technically is revoked by the expiration of 24 hours.

Some listing agents advise their home sellers to set a below-market asking price to create a buyer frenzy. The seller has no legal duty to sell the house for the full asking price, even if you made a full-price, all-cash, no-contingency purchase offer.

However, it is unethical for a listing agent to submit a home to the multiple-listing service at a price the listing agent knows the seller will never accept. I don't blame you for being upset with the listing agent and the seller. Unfortunately, this misleading practice is widespread in hot markets and is not illegal.

DEAR BOB: While the only stupid question is the one left unasked, this might be an exception. Suppose someone buys a house in a good area but, because of its condition, tears the house down and builds a new house on the lot. Does the buyer get to declare a loss on his income-tax return? I don't understand when someone says it is cheaper to buy a teardown house than to buy a vacant lot. -- David J.

DEAR DAVID: Your question is not stupid. Thousands of home buyers who want to live in a special neighborhood buy run-down houses there, tear them down and build their dream homes. This happens all over the nation, especially in older upscale neighborhoods.

When an existing house is torn down by the owner, there is no tax deductible loss involved. But the purchase price is added to the cost of additional construction to arrive at the adjusted cost basis.

To illustrate, suppose you buy an older house in a great neighborhood for $400,000. You tear it down and build a new house for $500,000. Therefore, your adjusted cost basis is $900,000.

DEAR BOB: Many times you have referred to a Starker exchange of one rental property for another rental property to avoid capital gain tax. My accountant has never heard of a Starker exchange. Such a tax-deferred trade could be useful to me, but now I don't know where to find more information. Can you help? -- Pete W.

DEAR PETE: You need to hire a new accountant because you are not receiving competent tax advice. The term Starker exchange is widely used among real estate investors. It refers to Internal Revenue Code 1031(a)(3).

That tax law allows tax deferral when you sell your property held for investment or use in a trade or business for another such property of equal or greater cost without reducing your mortgage balance.

The reason this technique is called a Starker exchange is it was created by the late T.J. Starker, who successfully traded his Oregon timberland tax-deferred for "like kind" property.

DEAR BOB: My son and daughter-in-law rent an apartment in a great community. They both have good jobs. But they have zero savings for a home down payment. I'm not in a financial position to help them with a down payment. With the high cost of houses where they live, is there any way they can ever buy their own home? -- Bill P.

DEAR BILL: Yes. Before looking at homes, your son and daughter-in-law should first get pre-approved in writing by an actual mortgage lender, such as a bank or mortgage banker. A mortgage broker can arrange such a pre-approval, but a mortgage broker's "pre-qualification" is worthless because he is not the money source.

If your son and daughter-in-law lack a cash down payment, that shouldn't stop them if they have decent FICO (Fair, Isaac and Co.) credit scores. With good FICO scores, they can obtain 100 percent mortgage financing.

Armed with a written pre-approval letter from a mortgage lender, then they can shop for a house or condo in the vicinity where they want to live. But you can counsel them not to expect their first home to be their dream home.

The important consideration is to get started on the first step of home ownership. To illustrate, my first home cost me $27,000. My friends thought I was crazy to pay so much. But I built equity from mortgage payments and market-value appreciation, then selling and moving up to better residences.

Today, I live in my dream home and I own a vacation home. Looking back, my first home was a dump compared with where I live today. We all have to stretch our budget to buy our first home. Your son and daughter-in-law can do the same.

DEAR BOB: I constantly hear radio ads for "option mortgages." As I understand them, I can pay either interest only, or the fully amortized monthly payment. Is this a good or bad deal? -- Suzanne P.

DEAR SUZANNE: Option mortgages can be a great way to buy a home with minimal monthly mortgage payments at the interest-only level.

However, if you plan to stay in the home, you should pay the amortized mortgage payment amount each month so you will eventually pay off the mortgage in 30 years.

But watch out for "negative amortization." That means your monthly mortgage payment at the interest-only level adjusts annually, but the actual interest rate adjusts monthly. Any unpaid interest is added to your mortgage principal balance. The result can be you owe more than you borrowed.

To avoid negative amortization, pay the full amortization payment, then you won't owe more than you borrowed.

DEAR BOB: For over seven years, I cared for my husband until he died from several causes. We were never legally married. But he often told me that because I took such good care of him I would inherit his real estate, which consisted of his house and at least three rental properties. However, after he died, his two sons took possession of his house and threw me out, I have not been able to obtain a copy of his will. How can I claim my inheritance? -- Josie H.

DEAR JOSIE: Oral promises mean nothing when it comes to inheriting real estate. Without written evidence, you have nothing.

If you weren't legally married to your "husband," that is another problem, because then you don't have any spousal rights. My best advice is to consult a family law lawyer, but don't get your hopes up.

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.

(c) 2005, Inman News Service