Q DEAR BOB: I am writing for elderly friends who are selling the house where they lived for 20 years and now want to buy a smaller house. Their accountant advised them they will owe a huge tax, even after their $500,000 principal residence sale exemption. But I disagree, because they are buying a less expensive home. I've enclosed the numbers. Who is right? -- Ernst S.

A DEAR ERNST: The accountant is correct. The old "rollover residence replacement rule" of Internal Revenue Code 1034 no longer applies to home sellers buying replacement homes. That tax break was repealed in 1997.

The federal government presumes the $500,000 principal residence sale capital gains exemption for a married couple (up to $250,000 for a single home seller) of Internal Revenue Code 121 is enough. Of course, I am presuming your friends owned and occupied their primary home at least 24 of the past 60 months before its sale to qualify.

Although your friends will owe a capital gain tax because of their large capital gain, at the current 15 percent federal tax rate plus state tax, they are receiving a big profit that they can easily afford to pay.

DEAR BOB: In 2004, my mother died and I inherited her free-and-clear house. On the advice of mother's lawyer, I chose a real estate agent to sell the house, but first it had to be brought up to building-code standards. To my great relief, the agent went above the call of duty to help arrange the repairs. She earned every cent of her sales commission. The sale was all cash with the approval of my mother's lawyer. I just thought you should know there are some great agents out there -- Margaret M.

DEAR MARGARET: In the 31 years I've been writing this column, I think yours is the first letter I received complimenting an agent for outstanding service. Of course, there are thousands of other excellent agents who also deserve praise, but it is just human nature that I receive mostly letters about real estate problems.

DEAR BOB: In 1981, we bought our property, which consists of a house and three rentals, for $200,000. My husband died in 1997 and our lawyer had the property appraised then for $240,000. I was disappointed because I thought it was worth more. In 2003, I had a real estate agent evaluate the property and he said it was easily worth $450,000, but I was not ready to sell. In May 2005, a new agent wanted to do a "work up" on my property's value. She came up with a current market value of $850,000, but she couldn't determine the correct 1997 stepped-up basis value when I inherited the property. Is there any way to do this? -- Margaret H.

DEAR MARGARET: A real estate agent can give you only her opinion of current market value, usually based on comparable nearby home sales prices, but not past market value. What you need is a professional appraiser who specializes in determining past market values, such as your property's market value on the date of your husband's death in 1997.

The best source for finding these specialist appraisers is on the Internet at www.appraisalinstitute.com. If you have difficulty finding such a local appraiser, give the Appraisal Institute a phone call at its Chicago headquarters for assistance.

DEAR BOB: About a year ago, we bought our five-year-old condo in a complex that is still run by the developer. We do have an official condo homeowners association and we have no control running our building despite paying monthly dues. There are never any condo owners' meetings or reports as to how our money is spent. The developer says we will become a condo homeowners association after 75 percent of the units are sold. Can we expect reports on where our money goes? -- Gary T.

DEAR GARY: The situation you describe is outrageous. Before you bought, you should have asked questions about the homeowners association and its reserves. You also should have asked for copies of the monthly meetings for the last six months.

If the developer still controls many units, he might never give up control of his complex. You and the other condo owners should consult a lawyer who specializes in condominium law.

DEAR BOB: You recently had a question about a separated wife who wants to sell her home but her husband doesn't want to sell. You said that a partition lawsuit could force the sale of the property. However, my situation is I own income property in a partnership. Can one partner force a sale of the property if the other partners don't want to sell? -- Edmond S.

DEAR EDMOND: The general answer is no, because the terms of the partnership agreement control when the property can be sold. Most partnerships provide for a majority vote on major decisions such as sale of the property.

DEAR BOB: Years ago, I wanted to buy a home but couldn't afford one. A solution arose when my widowed mother had to move from her apartment because of a highway project. I suggested we buy a two-family building where she could be my tenant. Over the years, she paid me fair market rent and I took the usual income-tax benefits on my tax returns. She died recently and now I have a problem. The building doesn't afford much privacy between the two units. I am wary of renting to a stranger who might have noisy children. Can I convert the rental unit to my personal use without a big hit on my taxes? -- Don H.

DEAR DON: Yes. There is no capital gains or other tax due when you convert a rental unit to your personal unit. There is no law requiring you to rent your mother's former residence. Of course, if you make structural changes to join the two units, you might need a building permit.

DEAR BOB: Since 1971, we have owned a vacation home on a lake about 35 miles from our primary home. Is it possible to avoid a capital gains tax on our $500,000 gain if we sell it, since we have occupied it for summers and weekends for a total time of more than 24 months during the 60 months before its sale? We never received mail there nor licensed a vehicle there. We have only utility bills as proof of occupancy. -- Margie F.

DEAR MARGIE: There is no tax break available for the sale of second or vacation homes, unless you want to convert it to a rental property before sale and then make an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater cost. Because your second home clearly was not your primary residence for at least 24 of the 60 months for its sale, the Internal Revenue Code 121 tax exemption up to up to $500,000 for a qualified married couple filing a joint tax return is not available. Consult a tax adviser for details.

DEAR BOB: I own my home in a gated, upscale community of manufactured homes. I am 79 and I need extra income so I applied for a senior citizen reverse mortgage. I paid for an appraisal, but I received a form letter stating my property was rejected because the property is "unacceptable." The sales agent for the reverse mortgage company was shocked. Do I have any recourse? -- Patricia S.

DEAR PATRICIA: You should make a polite phone call to the reverse mortgage origination company and ask to speak with a supervisor. All three major reverse mortgage lenders -- FHA, Fannie Mae and Financial Freedom Plan -- approve reverse mortgages on manufactured homes.

Your personal credit and income are irrelevant, unless you had a recent bankruptcy. Presuming your home is in good condition, the only reason for your reverse mortgage rejection could be your house is not on a separate lot to which you hold the deed.

DEAR BOB: I bought my home in 1971. I had the property surveyed then and paid a reputable company to install a fence on the property line. Recently, the children of my deceased neighbor inherited the house next door and had the property surveyed. They told me their survey reveals my fence is one inch on their property. They wish to remove my fence because they claim the fence belongs to them. Can they remove the fence that I paid for? Can I claim adverse possession of my neighbor's property where my fence is located? -- Carl L.

DEAR CARL: It's hard to believe there are nasty people out there like your new neighbors. Fortunately, you have a remedy, but it might cost you some money in legal fees.

If your survey was insured in your owner's title insurance policy you received when you bought your property in 1971, then your title insurer insured its accuracy. Be sure to notify your title insurer of this possible claim. Even if your fence is one inch on the neighbor's side of the correct boundary, you can claim a prescriptive easement for that tiny space. But it might require court action to perfect your prescriptive easement to prove "open, notorious, hostile and continuous occupancy" without the owner's permission.

The reason you need to hire a local real estate lawyer is to obtain an injunction to prevent the new neighbors from tearing down your fence, which they think is their fence. Before you hire a lawyer, however, try talking with the new owners. Maybe a modest payment, such as $500 or $1,000, will resolve the problem. If you pay them, be sure they sign a written, recordable agreement allowing the alleged encroachment to continue. That's what I did with my neighbor about 10 years ago.

DEAR BOB: I recently read your article about the 70-year old widow with a $33,000 existing mortgage who wants to get a reverse mortgage. You suggested she get a home equity loan or a reverse mortgage to pay off that small loan. Well, I wish her luck. Three times I tried to get a reverse mortgage and the lenders wanted $4,000 to $8,000 for a reverse mortgage to pay off my $30,000 mortgage. -- Carl K.

DEAR CARL: Reverse mortgages are not free. Up-front fees should generally be about 2 percent of your total reverse mortgage maximum amount, plus a few extra costs.

To illustrate, based on your age and your home's market value, let's say a reverse mortgage company approves a $200,000 maximum with 2 percent up-front fees. That means you would pay $4,000 in loan origination fees to get rid of your $30,000 mortgage and its payments. In addition, you would have $170,000 available for your choice of lifetime monthly payments, a credit line (except in Texas), or any combination. That's a good deal for you.

DEAR BOB: I would like to hear your feelings about parents deeding their house to the adult children but retaining lifetime use. -- Phyllis H.

DEAR PHYLLIS: Why would you want to do that? Unless you have a good reason for doing so, there is no advantage to your children until you die because you have a retained life estate. Unfortunately for you, they will be hoping you die as soon as possible. There also is a major disadvantage to them because their cost basis for the gift is the same as your probably low adjusted cost basis. Consult a tax adviser for details.

DEAR BOB: I recently called my bank to have a rate modification on my 30-year mortgage to market level. I was told they do not do rate modifications on fixed-rate mortgages, only on adjustable-rate mortgages. Is there any way I can lower my mortgage interest rate without paying refinance charges? -- William M.

DEAR WILLIAM: If your mortgage originator still owned your home loan, a rate modification might have been possible. Lenders don't want to lose good borrowers when interest rates drop, but your mortgage has probably been sold to another lender.

I learned this some time ago when I called my mortgage lender about a rate modification on my otherwise satisfactory mortgage on which I had a superb on-time payment record. I was politely informed my mortgage had been sold in the secondary mortgage market and the lender was only servicing it so they couldn't modify the interest rate. The result was I had to go through the refinance hassle.

Your lender probably has the same situation and is only servicing (collecting payments) your loan for the actual loan owner.

DEAR BOB: We bought our home in 1953. It was our personal residence until we moved to a life-care retirement home; then we started renting the house. We have not lived in the house for the past 15 years. My wife died recently and I sold the house. My questions are related to capital gains tax. We held the property in joint ownership. I am trying to determine my basis for income taxes. We made capital improvements and deducted depreciation during the rental years. What I am unsure about is the adjustment of the stepped-up basis after my wife's death. The language of the IRS documents is unclear. Can you help me? -- Roger N.

DEAR ROGER: You need to consult with a tax adviser to help you determine the exact stepped-up basis for the property after your wife's recent death.

DEAR BOB: In 2001 I sold a home through a realty company on a rent-to-own agreement. These tenants, who are friends of mine, had five years to arrange their own financing, but after three years of paying me rent toward "interest only," as written in the contract, they breached the agreement and moved out, leaving a huge mess of junk and damage. Now they are refusing to sign off the recorded deed, which includes their name. They insist their down payment be refunded, although I have receipts for damage repairs. What are my rights? -- John L.

DEAR JOHN: That is the worst rent-to-own agreement I have ever heard about. You should never have allowed your friends to record anything against your title. Rent-to-own, also known as a lease-option, is my favorite way to sell a home. There are major benefits for both the buyer-tenant and landlord. I have never heard of allowing the buyer to go on the title.

At this point, consult a lawyer to try to straighten out this mess. Your ex-residents have control over your title. Unless you clear up that problem, you have unmarketable title -- and they obviously know that.

DEAR BOB: In May 2002 we entered into an Internal Revenue Code 1031 tax-deferred exchange for the sale of our Kansas City, Mo., rental condo to a rental house in Sarasota, Fla. It was our understanding it should be rented at least six months and then we had to occupy it as our principal residence for at least two years before selling it. We rented the house for seven months and have occupied the house since January 2003. Now, I read in one of your recent articles that the length of ownership was changed as of Oct. 24, 2004, for such property acquired in an exchange to five years before we qualify for the $500,000 principal residence tax-free exemption. However, when we initiated the tax-deferred exchange, there was no five-year holding period for our situation. Does this new tax law apply to our situation? -- Roberta K.

DEAR ROBERTA: Yes. So many taxpayers figured out this major tax loophole that Congress changed the tax law.

Now, if you acquired a rental property in an IRC 1031 tax-deferred exchange, as you did, the acquired property must be owned at least five years and occupied as your principal residence at least 24 months during that time before you can claim the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return).

The federal government can change the tax law retroactively.

DEAR BOB: Four years ago, my mother died without a will so her estate had to go through the local probate court. There are four siblings entitled to our mother's estate, but two of those siblings died before her. Their five children are entitled to their late parents' share. The state is claiming that Medicaid reimbursements for her care the last years of her life in a convalescent home. Meanwhile, the only thing of value in mother's estate, her house, is rapidly declining in market value because of a lack of maintenance. My nephew lives in it with his buddies, but they refuse to pay expenses. I have paid the property taxes and mortgage payments to prevent loss by foreclosure. What can I do to speed this estate settlement and get reimbursed? -- Larry R.

DEAR LARRY: Your situation is an extreme example of what can go wrong after a property owner dies without a living trust or a will, and local probate court costs and delays complicate the state law of intestate succession to the statutory heirs. I presume the heirs are represented by a competent local probate lawyer. The best thing you can suggest is that all the heirs enter into a written division of your late mother's assets and present that agreement to the probate judge for approval. I can't imagine why it is taking four years to settle an estate, unless there are complications.

BOB: I live in Florida. My lawyer advises me not to put my home into my living will. What is your opinion of this? -- John W.

DEAR JOHN: I hope you meant to say "revocable living trust" rather than "living will." A living will is a written agreement specifying your desire as to medical care after you are unable to communicate. For example, if the late Terri Schiavo had a living will expressing her desire to be mechanically kept alive, or not, all that recent legal action would have been unnecessary.

A living will is obviously inappropriate for holding title to your home. In Florida, some lawyers advise their clients not to place title to homes in living trusts. But other lawyers say there is no problem if it is clearly a revocable living trust. I suggest you obtain a second opinion from a Florida lawyer experienced with living trusts.

DEAR BOB: I own my home and a rental house and I want to sell both. I don't want to move into the rental house and have to wait 24 months to avoid capital gain tax on its sale. Is there another way to avoid taxes on the sale of the rental house, such as offering it as a gift or bequest to my daughter so she can sell it? -- Rudy F.

DEAR RUDY: As you probably know, to qualify for the Internal Revenue Code 121 principal residence sale capital gain tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly), you must have owned and occupied your primary home at least 24 of the 60 months before its sale.

As for the rental house you want to sell, you could defer capital gain tax by making an Internal Revenue Code 1031 tax-deferred exchange for another investment or business property of equal or greater cost and equity. If you are tired of "tenants and toilets," you might want to exchange it for a tenant-in-common share of a net-leased property, which gives you monthly rental income but no management work.

If you give the rental house to your daughter, she will take over your presumably low adjusted cost basis for the rental house. When she sells the rental house, unless she makes it her principal residence to qualify for the IRC 121 exemption, she will have to pay the profit tax. In other words, such a gift shifts the tax burden to her.

If you make a bequest to your daughter in your will, that means she won't receive title until after you die. That could be advantageous for her because she will then receive a new stepped-up basis of the rental house's market value on the date of your death.

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