QDEAR BOB: My mother transferred the title to her luxury condo into her living trust. I was her successor trustee and her only heir after she died in February. Transferring title into my name without probate was easy, although I wasted about $750 for a lawyer to advise me. My question involves the stepped-up basis for inherited property because I decided to sell the condo. The net sales price in June was about $665,000. Mother paid $220,000 for the condo. Because her title was in a living trust, am I entitled to the stepped-up basis of about $665,000? Do I need an appraisal? -- Denise T.

ADEAR DENISE: I'm glad to learn your mother's living trust avoided probate court costs and delays for you. That is the primary purpose for a living trust.

A secondary purpose is that you, as successor trustee, could have managed her living-trust assets if your mother became incapacitated before she died.

Holding title to your mother's condo in her living trust didn't have any effect on a new stepped-up basis to market value when she died. When you inherited that condo, your adjusted cost basis was its market value on the date of your mother's death.

Presumably that market value was around $665,000, the net sales price shortly after her death. That was your stepped-up basis, so you have little or no capital gains tax to pay.

DEAR BOB: In September or October we plan to sell our summer home, which we have owned for more than 25 years. It has been a wonderful place for our children, but the maintenance is costly. It should sell for about $400,000, although we paid $37,000 for it many years ago. Can we make a tax-deferred exchange to avoid the huge tax? -- Ralph R.

DEAR RALPH: Vacation- or second-home sales are not entitled to any special tax breaks such as an Internal Revenue Code 1031 tax-deferred exchange. The reason is that the property is neither your principal residence nor property held for investment or use in your trade or business.

Presuming you don't want to move in to make the house your full-time principal residence for at least 24 months before selling, the only way to defer tax would be to rent the property for at least six months to a year before selling. Then it can qualify as a rental property for a tax-deferred exchange. Or, perhaps you might want to lease it with an option to buy. Consult a tax adviser for details.

DEAR BOB: Is it possible for my husband and me to set up our own living trust for our home?

-- Karlyn G.

DEAR KARLYN: You can set up your living trust yourself, but don't forget to transfer your home's title into your living trust. Lots of living-trust owners forget to do that, thus making their living trusts worthless. A good book to read first is "Make Your Own Living Trust" by lawyer Denis Clifford (Nolo Press, Berkeley). The book includes a CD-ROM of instructions.

DEAR BOB: We live in a 100-unit condo community that was built about 25 years ago. Our reserve account is around $100,000. At the last monthly meeting, the board of directors presented and approved an extensive landscaping plan that is not funded in the current budget. When questioned about the source of funds, the answer was "the reserve funds." Since paying for this landscaping would reduce our reserves by 50 percent, is this project a proper and legal use of reserve funds? -- James K.

DEAR JAMES: It is highly irresponsible for a 25-year-old, 100-unit condo association to reduce its reserve funds balance to $50,000, which is just $500 per unit. In the event of an emergency, such as the need to replace the roof, special assessments on each member would be needed.

Spending reserves on landscaping is not irresponsible. It will probably add value to the condo complex. But reducing your association's reserve to such a low level is questionable. However, because the association's directors voted to do so, there isn't much you can do but pray an emergency special assessment doesn't become necessary. At the next annual meeting of your association, you and other responsible members should suggest raising the monthly dues to rebuild your association's reserve account to at least $2,000 to $3,000 per unit.

DEAR BOB: Why aren't professional home inspections required by law? We recently bought our first home, which is about four years old. Our buyer's agent told us that she negotiated a fantastic deal, but she said we didn't need an inspection. I insisted and we hired an inspector, who pointed out a musty smell was from water beneath the house. He showed us how the water was draining toward the townhouse instead of away. Although the inspection delayed our purchase about six weeks, we got an $8,000 credit to pay for regrading the drainage to prevent moisture and mold under our townhouse.

-- Kevin H.

DEAR KEVIN: Congratulations for insisting on a professional home inspection. Some agents fear inspections will kill the deal. However, it's better to discover home defects before purchase, rather than after. To find local inspectors who are members of the American Society of Home Inspectors, see www.ashi.com.

DEAR BOB: About four years ago I co-signed the mortgage papers so my brother could buy a condo. He is constantly late with his mortgage payments. Several times, I had to make his payments to prevent foreclosure, but he has never repaid me and he now owes me more than $10,000. His late payments have ruined my credit score. What can I do to get my name off his mortgage? I already have signed a quit-claim deed to get my name off his title. -- Carla P.

DEAR CARLA: Until your brother refinances or sells the condo, your name will remain on that mortgage. The mortgage lender would be crazy to release you from liability.

Your situation shows why friends and relatives should be extremely reluctant to co-sign for irresponsible buyers such as your brother. Presumably your brother's credit is bad, so the best thing you can do is encourage him to either shape up or sell his condo.

DEAR BOB: What do you think of the new "option" mortgages? I am thinking of refinancing with an option mortgage, so I would then have the choice of making either interest-only or amortized monthly payments. Is this a good or bad deal? -- Carl O.

DEAR CARL: If you plan to keep your home only a few years, the interest-only option keeps your monthly mortgage payments at rock bottom. Another advantage is that 100 percent of your monthly mortgage payment is fully tax-deductible interest. However, if you expect to keep your home many years, you probably want to start reducing the mortgage balance and building equity by paying down the mortgage balance. Then you can choose the fully amortized monthly payment.

Watch out for option mortgages that allow negative amortization. That means the adjustable interest rate changes faster than the monthly mortgage payment, possibly resulting in unpaid interest being added to your mortgage balance.

DEAR BOB: More than 18 months ago, my husband and I bought two acres for $44,900. Our plan was to build our home on this land and sell our primary residence. My husband died recently and, with no intention of building a home without him, I sold the land for $138,200 net. Now I am in the process of refinancing my primary residence to make the mortgage payments more manageable. I will pay $92,000 at the loan closing to bring my mortgage balance down. Will I have to pay capital gains tax? If so, how much? -- Paula W.

DEAR PAULA: Consult a tax adviser about the capital gains tax on your profitable land sale. Depending on how title to that land was held, you received a partial or full new "stepped-up basis" to market value on the date of your husband's death. That stepped-up basis will greatly reduce your capital gain tax on the land sale.

The maximum federal capital gain tax is 15 percent. Depending on what state the land is located in, you probably will owe state capital gain tax, too. After you know your exact capital gains tax situation, then you can decide if you want to use the leftover cash to reduce the balance on your home's refinanced mortgage.

DEAR BOB: My wife and I hold joint title to our home. She recently said she wants her name off the title. When pressed to explain, she said she just wants her name off the title to our home. If she carries this out, is there anything I can do to stop it? -- Fred R.

DEAR FRED: Maybe I missed something in your letter, but to whom does she plan on conveying her half of the house?

The normal way of conveying a partial title interest would be a quit-claim deed. I don't know any way you can stop a co-owner from signing a quit-claim deed.

The result could be you might wind up owning half of the house with a stranger. Of course, if she signs a quit-claim deed to you, then you would own 100 percent of the title.

The only exception I can think of would be if you and your wife hold title as tenants by the entireties. This is a special version of joint tenancy with survivorship between husband and wife where the signatures of both spouses are required to convey valid title. Consult a lawyer for details.

DEAR BOB: As a divorce lawyer, I shared your concern that the lady who still held title with her ex-husband who might be deceased should have received the property title as specified in her divorce settlement. I agree the divorce lawyer should have taken care of the title transfer at the time of the divorce. As for learning if her ex-husband is now dead or alive, she can find out by going to the Social Security death index, which is free on the Internet from several services. I hope this helps, as she already has enough problems -- Mary T.

DEAR MARY: Thank you for that valuable information. To find the index, search online for "Social Security death index."

DEAR BOB: My son and his wife, along with their two young children, are about to sell their house and rent another house. They bought their house in April 2003 and refinanced it in March 2004. Their real estate taxes and adjustable-rate mortgage have gone up. They are in debt and have poor credit. As a result, they are unable to refinance. Rather than lose their house, they feel their only option is to sell, pay off their debts, improve their credit and use any money left as a down payment on another house in approximately a year. Are there any other options available to them? -- Pat R.

DEAR PAT: Rather than selling their home, their obvious solution is to increase their income if at all possible. Taking a temporary part-time job to pay off those debts makes far more sense.

I don't like to see people sell their home if it is appreciating in market value unless the mortgage payments are far greater than their monthly income. Renting an equivalent house or apartment probably won't be much less expensive than continuing to stay in the current house.

Selling the house loses any equity that has been built up. Sales costs typically eat up 6 percent to 10 percent of the sales price. If they sell, and if they have any net capital gain after paying all the sales expenses, then because they owned and occupied their principal residence at least 24 of the 60 months before its sale, up to $250,000 in capital gains is tax-free under Internal Revenue Code 121 (up to $500,000 for a married couple filing jointly). More details on the tax aspects are available from their personal tax adviser.

DEAR BOB: We plan to sell our home and have taken your advice to interview three real estate agents who sell houses in our area. So far, we have interviewed two agents who both have sold houses in our neighborhood. But they insist on 90-day listings. I seem to remember you said a 90-day listing is too long and a 60-day listing is better. Should we try to get a 60-day listing? -- Jean S.

DEAR JEAN: Try a 90-day listing. It gives your listing agent plenty of time to implement a marketing program, yet it doesn't tie you up for a long time, just in case you selected the wrong agent.

Perhaps you recalled that I don't recommend 180-day listings, which are far too long unless you have a multimillion-dollar home that will take a long time to sell because there are only a limited number of buyers for such expensive houses.

Just between us, a super-sharp agent will get your house sold in 60 days or less. However, a 90-day listing works well in most markets, so don't argue over that issue.

DEAR BOB: My wife and I divorced about a year ago. She got the house and was supposed to refinance the mortgage so I would have no further obligation, but she failed to do so. She has remarried and says she and her new husband plan to buy another house together. Meanwhile, she is ruining my credit by making late payments on our mortgage. What can I do to force her to either refinance the mortgage or sell the house? -- Mervin W.

DEAR MERVIN: Unfortunately, after your divorce became final, there isn't much you can do to force your ex-wife to live up to her part of the divorce agreement by refinancing the mortgage or selling the house.

Your divorce lawyer should have made certain there was a penalty for failure to comply with the divorce settlement.

At this point, all you can do is beg your ex-wife to refinance, sell or at least make the mortgage payments on time. Consult a lawyer for details.

DEAR BOB: We are buying a newly built house. Do you recommend we obtain a professional home inspection, which you suggest for buyers of resale houses? -- Terrie R.

DEAR TERRIE: Yes, buyers of new houses should insist on a professional home inspection before taking title. Of course, as the buyer, you get to pay for the inspection, so you can accompany your inspector to discuss any defects discovered.

Although most builders construct quality houses, even the best make mistakes. Don't count on the local building inspector to catch the errors. These inspectors usually do a great job, but sometimes they miss serious problems.

Spending $400 or so to hire your own professional home inspector will be money well spent.

DEAR BOB: Five years ago, my mother-in-law gave a house to my husband and his sister. My husband has lived in the house for three of those five years. We are now remodeling our home and my husband wants to sell his half to his sister. Can he qualify for that $250,000 tax exemption? Are there special tax forms to file? -- Sue S.

DEAR SUE: If your husband owned and occupied the house as his principal residence for an aggregate 24 of the 60 months before selling his half of the property, he can qualify for the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 if you also meet the occupancy test even if your name is not on the title).

There are no special IRS forms to file when qualifying for the IRC 121 principal residence sale tax exemption. Consult a tax adviser for details.

DEAR BOB: My mom co-signed a mortgage on a house that my brother bought about a year ago. He's not working and has few assets. Mom is worried that if my brother is sued for whatever reason, and he doesn't have the resources to pay the judgment, the suing party can go after her assets, mainly the house. How can my mom get her name off the title and the mortgage? -- Robert H.

DEAR ROBERT: To get her name off the title, your mom can sign and record a quit-claim deed to your brother, thus giving him 100 percent ownership of the house and giving up her ownership interest.

However, she can't get off the mortgage obligation to the lender. If your brother fails to make the mortgage payments, that will hurt your mother's credit rating. Only if your brother sells the house or refinances the mortgage in his name alone, which seems highly unlikely, will your mother be relieved of that mortgage obligation.

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