QDEAR BOB: In 1956 my parents bought their house for $13,000. By a gift deed, title was transferred several years later to my sister, who lived with our parents. My parents died in 1987 and 1988, and my sister died in 2004. She had a revocable living trust. Proceeds from the sale of her house after her death were shared by her five surviving siblings, including me. Our lawyer says there is no capital gain tax because we automatically received a stepped-up basis for the inherited house. How is the basis is determined. -- Tony J.
ADEAR TONY: Your situation is an example of doing everything right. Usually, I receive letters about costly mistakes.
After your sister died in 2004, the five surviving siblings received title to her house at its current market value on the date of her death under the terms of her living trust. Because of her decision to hold title in her revocable living trust, there were no probate court costs or delays.
The heirs appear to have decided to sell the house soon after your sister's death for a price that was about the same as its automatic "stepped-up basis" market value on the day she died. Therefore, you had no profit difference between your stepped-up basis and the net sales price so no tax is due on the sale. The heirs get to enjoy their tax-free cash thanks to the stepped-up basis rule.
DEAR BOB: You recently replied to a homeowner who bought a house for $200,000, tore it down, and built another house for $400,000. You said his basis is $600,000. My question: When a house is destroyed by fire and the insurance company will pay the full replacement cost, which is higher than the original purchase price, will the basis cost for the new house be the original purchase price plus the cost of the new house? -- Jen T.
DEAR JEN: No. Taxwise, a fire loss is an "involuntary conversion." Tearing down an existing old house and building a new one is voluntary. The tax result is completely different.
When fire insurance pays to rebuild a burned house, the insurance payment is not taxable but it doesn't add to the adjusted cost basis of the home.
Of course, if you add additional cash to the insurance proceeds, perhaps to add on or upgrade the house, that additional investment will increase your adjusted cost basis. Consult a tax adviser for details.
DEAR BOB: In 1990, the title of my widowed mother's home was transferred to her three children. After reading your articles, I now know that we should have instead set up a revocable living trust for her and kept the house in her name. Is there anything that can be done now, as our basis for the house is far below today's market value? Would transferring title back to her make sense? She is now 82, enjoys her home, but with declining health we don't know how long she will be able to live alone. If we need to sell the house to pay for her care, a big portion of the proceeds will be lost to taxes. Any ideas? -- Barbara M.
DEAR BARBARA: The costly mistake of deeding the house to the adult children was made in 1990. The current owners, as recipients of a gift, are now stuck with the home's low market value as of that date.
The three adult children could quit claim the house back to mom as a gift, but then she receives their low 1990 valuation. However, if she then occupies and owns the house at least 24 of the 60 months before selling it, she could claim up to $250,000 in tax-free profit under Internal Revenue Code 121. Consult a tax adviser for details.
DEAR BOB: I am 76, separated from my husband for five years, and I want to sell our mutually owned home. My husband doesn't want to sell. What are my choices? -- Blossom G.
DEAR BLOSSOM: Unless you have a legal separation agreement with your husband that allows sale of the home, you will probably have to resort to a lawsuit to force a court-ordered home sale.
Because the home is co-owned, you will each then receive 50 percent of the sales proceeds. Such a court action is called a "partition lawsuit." That means the judge can order the property sold with the sales proceeds split according to ownership shares. Consult a lawyer for details.
DEAR BOB: About two years ago, I decided to move out of my large house so I can live downtown in an apartment. My son, then 24, and his live-in girl friend talked me into selling my house to them for nothing down. All went well for about a year while they were both working. They paid me $1,654 per month, which covered my apartment rent. She became pregnant and she moved out. My son can't afford to pay me the full mortgage payments and he is now about seven months behind. I've been able to pay my rent from savings, but I don't know how long this can last. When the baby arrives, my son will have to pay child support. What should I do?
-- Angie W.
DEAR ANGIE: As a mortgage lender, you only have one legal remedy -- foreclosure.
Foreclosure will ruin the credit of your son and his ex-girlfriend. They also will lose any equity they have acquired in your former residence.
At the foreclosure sale, you will either receive full payment, including arrearages, from the high bidder, or you will reacquire title to the house if there are no bidders.
Presuming they are both on the title, you need to have a discussion to help them decide what to do. The best alternative is for them to sell the house to obtain some cash from their equity. To make the sale attractive to a buyer and preserve your monthly mortgage income, you could agree to allow your mortgage to be assumed by a credit-worthy buyer. That way, everybody benefits.
DEAR BOB: My son, 22, has a great job with an accounting firm. He earns $66,000 per year as assistant to a senior partner. He just graduated from college in June. After he passes his CPA tests, he has been promised a big pay raise. He interned for two summers with the same firm and his bosses say he has great potential. Already, he has brought in several major customers for the firm. He wants to buy a condo rather than wasting money on apartment rent. However, a mortgage broker friend couldn't get him pre-approved because he is so young and doesn't have any credit yet. Do lenders discriminate against young borrowers? -- Thomas R.
DEAR THOMAS: By law, mortgage lenders cannot discriminate against borrowers by age, whether young or old. For example, when my parents were in their seventies, they obtained a 30-year mortgage to buy their retirement condo.
What matters most is your son's Fair, Isaac and Co. credit score. He can obtain it and his credit report at www.myfico.com. FICO scores don't even consider age.
If your son doesn't have a Visa, MasterCard and American Express card, he should obtain them. His employer can introduce him to a banker where the firm does business. After a few months of on-time credit-card payments, he will be on his way to establishing a good credit score.
DEAR BOB: We inquired about a reverse mortgage but were turned off by the high closing costs -- more than $5,000, plus $39 per month in fees, plus the interest and payment. It would take a lot of our home's market value if we decide to sell. What should we do? -- Robert N.
DEAR ROBERT: Presuming you and your wife are both at least 62, if you need a lump sum to pay a major expense, such as a new roof, new car or a trip; would enjoy monthly lifetime income without any repayments; want the security of a credit line, except in Texas; or any combination of these, a reverse mortgage is ideal.
But your letter puzzles me when you said the interest and payment bothers you. With a reverse mortgage, there is no repayment required until you either sell the home, move out for longer than 12 months, or die.
At that point, the principal and interest, plus those darn $39 monthly service fees, "mature" and must be paid, usually from the home sales proceeds.
As I've often said, when I'm about 85 or 90, I plan to get a reverse mortgage because I think it is a good deal. The older you are, the better the reverse mortgage benefits.
DEAR BOB: I own and live in a nice condo in what I thought was a well-managed association of 24 condo owners. But when our longtime treasurer, a retired accountant, died suddenly, we discovered we are practically broke. He was a nice old man who everybody loved. At his funeral, which almost all the condo association members attended, he was highly praised. A few weeks later, after our condo board of directors appointed a new treasurer, we discovered the ugly facts. He wasn't corrupt, but he just didn't tell us we needed to raise the dues to have adequate reserves for emergencies. Isn't there a law requiring adequate reserves? -- Harper T.
DEAR HARPER: State condominium laws establish guidelines, such as periodic reserve replacement estimates, but there is almost no enforcement unless a condominium board of directors takes charge and insists on adequate reserves. Most condo associations also are required to have annual audits of their treasury. Large associations can afford to have outside audits. But smaller associations rely on member audits.
To illustrate, for many years my mother was on the audit committee of her condo association. Although she wasn't on the board of directors, nor was she an accountant, she was very financially savvy.
She and the other audit committee members, in addition to going over the expenses, recommended increasing the monthly fees to increase the reserves. The board eventually listened and now has a 5 percent annual dues increase policy to pay for rising expenses and to keep the reserves growing as the property ages.
DEAR BOB: My mother died in 1999. I knew her will left her house to my brother and me, her only children. My brother, who is mentally challenged, lived with my mother and took great care of her during her last years. He still lives in her house, and I think he should continue living there. He has enough income as a bagger at the nearby supermarket to pay the house expenses, as it is free and clear. But what should we do about the house title? -- Aran H.
DEAR ARAN: You should have the title to your late mother's house probated as soon as possible, according to the terms of her will. Consultation with a local probate lawyer will inform you of the least expensive method of transferring title to you and your brother.
Because of your brother's special situation, you might want to have a conservatorship created to look out for his best interests, especially if he doesn't have a written will.
DEAR BOB: I am 76, in fair health, with a yearly income of about $20,000 from Social Security, a small pension and an IRA. My three-bedroom house has a $46,184 mortgage. Houses like mine nearby sell for about $500,000, but my daughter wants to buy my home and will allow me to live in it until I am unable to care for myself. I know you frown on adding a child to the title, but she is the executor of my living trust, has a medical power of attorney, and I trust her completely. Is this a good idea to sell her my house as an investment and pay me monthly income? -- Gerald S.
DEAR GERALD: I am not thrilled by your daughter's suggestion. Why give up control of your most valuable asset?
For your daughter, that's a great deal. But for you it could become a big problem living on a fixed income from their mortgage payments to you.
At age 76, you are in a great position to obtain a reverse mortgage, which requires no repayments as long as you live in your home. The reverse mortgage could pay off your current mortgage, and give you choices of lifetime monthly income, a credit line (except in Texas), or lump sums as you need them, such as for a new roof, new car or whatever.
When you move out of your home for more than 12 months, sell it or die, then the reverse mortgage principal and interest is paid off from the home sales proceeds. Until then, you control the situation.
DEAR BOB: You said you were shocked that a lawyer told his client she should prepare a quit claim deed and leave it with her will so her house would not go through probate after she dies. Your alternative suggestion was a revocable living trust. Where I live, we have real estate transfer-on-death deeds to a named beneficiary that avoids probate. Aren't lawyers aware of these new laws? -- Dorothy C.
DEAR DOROTHY: Although many states have laws allowing transfer-on-death designations for bank accounts, stocks, bonds and other personal property to avoid probate court costs and delays, few states allow transfer-on-death realty deeds.
There are pro and con reasons regarding real estate transfer-on-death deeds to avoid probate.
To illustrate, if you transfer your real estate to me in your will, but we later have a falling out, you can easily cut me out of your will. However, if you have a transfer-on-death real estate deed, it's a hassle to change it if I die before you do and you forget to change the transfer-on-death deed. Consult a lawyer for details.
DEAR BOB: How does the IRS figure capital gains tax for property when the seller doesn't know the original purchase price? Along with a partner, my parents bought several acres of unimproved timberland in 1969. Then they bought out his half. Dad has passed away. Mom has no records of the original purchase price. She says in her state (Missouri) the purchase price is not recorded with the transfer of ownership. Are any adjustments made for inflation, as the gap from 1969 to 2005 dollars is huge? -- Martin R.
DEAR MARTIN: If your mother decides to sell her timberland, she has a big tax problem determining her adjusted cost basis. It is possible, though, to have a retrospective property appraisal made. The IRS has leeway to accept such estimates when the actual cost basis is not available.
However, if your mother dies while still owning the property, and you inherit it, your problem is solved. The reason is you will take title with a new stepped-up basis of market value on the date of your mother's death.
DEAR BOB: My wife and I made a purchase on a house, which had been listed for sale at least two months. Our buyer's agent told us the seller accepted our offer. We were happy because we knew our offer was about $10,000 below recently similar home sales in the area. About two weeks ago, after we spent money on a $400 home inspection, the seller accepted another offer, which was about $5,500 higher. It turned out our purchase contract was never accepted in writing, although the listing agent assured our buyer's agent the offer had been accepted. Do we have any recourse other than getting our $5,000 deposit refunded? -- Durel R.
DEAR DUREL: Your situation shows why it is so important to get everything involving real estate in writing so you have a legally enforceable contract.
I am shocked you waited two weeks and didn't receive a written copy of the sales contract with the seller's acceptance signature, but went ahead and spent $400 on a professional home inspection.
At this point, all you can do is get your $5,000 good faith deposit refund and be satisfied you didn't waste more than the $400 home inspection fee.
DEAR BOB: We had a horrible experience with our listing agent. She lied to us about the status of our home sale after we thought we had a solid sale. Our buyer was not pre-approved by an actual lender (he had only a worthless pre-qualification by a mortgage broker), as our listing agent misrepresented to us. This went on and on for four months before we realized our agent was lying to us and the buyer couldn't buy our home. After the listing expired, we sold our home to a friend and saved the sales commission. I then filed a written complaint with the local realty association. Two months later, all I received was a rude letter from the association director saying the Realtor had been warned to be more cautious in the future. Why didn't they kick the guy out? -- Claudia I.
DEAR CLAUDIA: Realtor associations rarely discipline their members by kicking them out of membership. The reason is the associations don't want to get sued by their disciplined member for deprivation of the ability to earn an income.
Although the National Association of Realtors heavily advertises its code of ethics, and it enforces the code after a complaint is filed against a member, the group rarely removes an active member.
Your best recourse is to file a complaint against that wayward realty agent with your state real estate commissioner. If there was a state real estate law violation, the real estate commissioner might revoke that agent's license.
DEAR BOB: I am a widow, mid-seventies, with an 8.25 percent interest rate mortgage. I owe about $33,000 and would like to refinance. But because my balance is so low, mortgage lenders don't want to help me. I have only Social Security and a retirement check, which gets smaller each year. What should I do? -- Jean M.
DEAR JEAN: You have two excellent choices. One is to take out a home equity loan to pay off that $33,000 mortgage. Most such loans are at the prime interest rate (6.5 percent as I write this) and you can pay only interest to reduce your monthly payment to rock bottom.
However, you might not have enough income to qualify for a home equity loan. But don't despair. You have a better alternative.
As a senior citizen homeowner over 62, you qualify for a home equity mortgage. You can select the lump sum alternative to pay off that $33,000 balance. Then you can use your excess reverse mortgage entitlement to receive lifetime monthly income, or a credit line (except in Texas).
In your situation, a reverse mortgage can help you enjoy your retirement years without cash worries.
DEAR BOB: Several years ago, I inherited about 140 acres of pine timberland. The trees have been recently harvested so I am waiting for them to regrow from new planting. Meanwhile, the land produces zero income and I have to pay the property taxes and other expenses. I am told this land is very valuable. I can't find any bank or other lender willing to make me a mortgage loan. Any ideas?
-- Jon R.
DEAR JON: Land loans are risky for mortgage lenders, especially if the land doesn't produce any immediate income. Also, you have a risk that a forest fire might destroy your pine trees. Perhaps selling is your best alternative if you need cash.
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