QDEAR BOB: Recently, my wife and I made our first purchase offer to buy a townhouse that is in a 20-year-old development. Following your advice, we included contingency clauses for obtaining a mortgage and for a professional property inspection. The mortgage was no sweat because we were already pre-approved by a lender and the appraisal was fine. However, the professional inspector found several problems with the townhouse that will cost about $5,000 to fix. The sellers agreed to give us a $5,000 credit. But now their listing agent says since we didn't approve our professional inspector's report, the sellers can cancel the sale. We think they have a better offer from another buyer. Can the seller cancel our sale on this technicality? -- Bubb R.

ADEAR BUBB: To be legally correct, after the mortgage appraisal was satisfactory and you reached an agreement with the seller about the defects, your buyer's agent should have had you sign a contingency removal agreement. However, if you have written evidence of that $5,000 repair credit from the seller, that is almost the equivalent of waiving the professional inspection contingency. I suggest you proceed with the purchase.

If the seller fails to show up at the closing and deliver the deed in return for your payment, you should be prepared to immediately file a lawsuit for specific performance of the sales contract and record a lis pendens against the title. Be sure the seller knows you intend to litigate if necessary.

DEAR BOB: My husband and I are retiring next year and are interested in buying a smaller home. The residence we are considering is where the buyer owns the house but the land is leased for 12 years. I have never seen this subject in your column. Everything else is what we want, such as low property taxes and close proximity to the water. What is your advice? -- Isabel K.

DEAR ISABEL: Forget that purchase unless you will have an option to buy the land under your home for a locked-in price. Unless you have an option to buy the land under your house, at the end of 12 years when the lease ends, the land owner will own your house.

DEAR BOB: I recently made a tax-deferred exchange into several houses that I am now trying to rent, but the local rental market is slow. Any suggestions how I can find tenants in a market where there are too many vacant rentals and not enough prospective tenants? -- Laith S.

DEAR LAITH: A method that has never failed me is to advertise the houses as "rent to own" or "lease with option to buy." Advertise under "houses for rent" and "houses for sale."

Headline your ad "$5,000 moves you in," or whatever number is appropriate for your local market. The move-in cost should include the first month's rent plus nonrefundable option consideration.

Advertise a Sunday open house. If you do it right, you will be swamped with prospective renters and buyers. There are always more lease-option buyers than sellers. Be sure to give a decent rent credit toward the purchase price. For example, suppose the house would rent for $1,000 per month. Offer a 33 percent or 50 percent rent credit toward the down payment.

DEAR BOB: We own a house, but we have never lived in it because we are required to live in a parsonage owned by the church where my husband is the pastor. Our son's family has lived in the house for 15 years at a rent of $200 per month. Can we sell the house as our principal residence and be exempt from capital gains tax, as this is our only residence? If not, how do we prove our primary residence, such as utility bills or tax records?

-- Joan T.

DEAR JOAN: There would be no tax exemption for you and your husband. The Internal Revenue Code 121 $250,000 principal residence sale tax exemption (up to $500,000 for a qualified married couple filing a joint tax return) only applies when the sellers own and occupy their "main home" at least 24 of the 60 months before its sale.

Occupancy by your son's family doesn't qualify. To establish your primary residence, IRC 121 requires you to own and occupy the home as your principal residence at least 24 months before its sale. Full details are available from your tax adviser.

DEAR BOB: My 24-year-old daughter would like to buy a rental property in Las Vegas, but her credit score is not high enough to qualify for a mortgage. She has a good job and can afford a small negative cash flow. Do you think it is a good idea for my husband and me to buy this property under our names and then add her name to the title after the deal closes? Will she be able to enjoy the tax benefits without our incurring any capital gain tax? -- Thida L.

DEAR THIDA: You can buy the rental property in your names, obtain the mortgage, and then add your daughter to the title without incurring any tax liability. That's presuming you are not giving her the down payment cash.

If you are giving her the down payment and it exceeds $11,000 per donor, then you have to file a federal gift tax return, but no gift tax will be due unless your lifetime gifts exceed $1 million.

The tough part of your question is whether I think it is a good idea to help your daughter buy a rental property in Las Vegas. That is a highly speculative market right now. If your daughter has a good job there earning not more than $100,000 annually and she needs tax shelter benefits, it might be worthwhile buying the rental property for the tax loss deduction up to $25,000 per year. Consult a tax adviser for details.

DEAR BOB: In a recent article, you said making extra principal payments on a 5 percent mortgage is really investing that extra money at 5 percent. Are you sure? Isn't it true that after subtracting the interest deduction on your income tax returns and considering how inflation cheapens the dollar, the actual cost is much less?

-- Robert P.

DEAR ROBERT: A homeowner making extra principal payments on a 5 percent interest rate mortgage isn't really earning a full 5 percent on that investment. The homeowner is saving 5 percent interest, but after the income tax savings and inflation, the actual savings is less than 5 percent. But who cares? It's still a good deal to pay off mortgage principal.

DEAR BOB: I was sorry to see your item a few weeks ago discouraging that retired couple from buying a mobile home. About four years ago, my husband and I sold our too-large house, used that $500,000 home-sale tax exemption you often discuss, and bought a mobile home on a foundation with a separate lot for about $300,000 complete. It was the smartest thing we ever did. Our well-built "wobbly box" came through last year's bad weather in excellent condition, much better than nearby stick-built houses. -- Kathy Y.

DEAR KATHY: Thank you for sharing your experience. To be precise, you own a manufactured home that is bolted to a foundation located on a separate lot in a manufactured-home development.

That is far different from a mobile home located on a leased "pad" in a mobile home park, which those readers were considering. I suggested that, before they sell their house, they rent a mobile home to see whether they enjoy the radically different lifestyle.

DEAR BOB: I would like to make a home purchase offer with a 15-year mortgage, a 20 percent cash down payment and a 5 percent interest rate. After the home seller accepts my offer, suppose the bank approves my mortgage at terms other than what I specified. Can I back out of the purchase contract or do I have to accept the offered interest rate? -- Ray X.

DEAR RAY: You can make your home-purchase offer contingent upon obtaining a mortgage at the terms you specify in the offer. However, if you make a good-faith effort by applying with several mortgage lenders and cannot obtain the specified mortgage terms, then you can either accept the best available terms or show the seller the contingency can't be met and get your earnest money deposit refunded.

A better tactic before shopping for a home is to first get pre-approved in writing by a mortgage lender. Then you will know the mortgage terms available, contingent on the home appraising for the purchase price you offered and the seller accepted.

DEAR BOB: We recently sold a rental house. Do we owe full capital gains tax on the difference between our purchase and selling prices? Can we deduct our capital improvements and the sales commissions paid? -- Sharron M.

DEAR SHARRON: Unless you made an Internal Revenue Code 1031 tax-deferred exchange of the rental residence for another rental property of equal or greater cost and equity, your capital gain is taxable.

The capital gain on the sale is the difference between the property's "adjusted sales price" and its "adjusted cost basis." Adjusted sales price is the net sales price. That means gross sales price, minus expenses such as the sales commission, transfer tax and other sales costs.

Adjusted cost basis is the purchase price, plus capital improvements added during ownership, minus depreciation and casualty losses deducted during ownership. In other words, the capital improvements are an addition to your original purchase price. Consult a tax adviser for details.

DEAR BOB: I bought a new rental house, and I am tracking all the expenses and plan to depreciate the house. What accounting forms do I need? Should I set up a LLC? -- Michael F.

DEAR MICHAEL: You have a simple rental house situation. Get a copy of income tax return Schedule E to see what expenses you can deduct for your rental house. This is the same form where you will report rental income.

If you own just one rental property, it might be a waste of time to create an LLC (limited liability company) because the costs for LLCs can be quite expensive. Of course, be sure to carry adequate liability insurance to avoid potential negligence losses.

DEAR BOB: I am about to refinance my property and pull out a lot of cash for future investments. The property has an unused home equity line of credit that I will have to close because I would rather have $160,000 cash instead of having the line of credit subordinated. However, I am going to get hit with a $500 prepayment penalty for closing the credit line before three years. It has been open about a year and a half. Is there any way to avoid the prepayment penalty? -- Chip C.

DEAR CHIP: Let me get this straight. You don't want to pay a $500 prepayment penalty on your credit line so you can take out $160,000 in tax-free cash from your first mortgage refinance. Sorry, I am not aware of any way to avoid that $500 prepayment penalty on your credit line. Have you tried politely asking the lender to waive the prepayment penalty if you pay the lender's costs of clearing the credit line from your title?

Considering that it probably cost you nothing to obtain that credit line and the lender absorbed the cost of appraisal, title insurance, document preparation and recording, and hasn't earned any profit from your unused credit line, it's really fair for that lender to receive its prepayment penalty.

DEAR BOB: I just wrote my senator to try to obtain a legible survey of my townhouse. The county's record is illegible. I need to know the exact boundary before I pursue a neighbor's rotting fence. Do I have any recourse? -- Angel A.

DEAR ANGEL: Your county or city keeps recorded subdivision maps on file after a new subdivision is recorded. I presume your townhouse is part of such a subdivision.

If the recorded map is illegible, another source to check is your homeowner's title insurance policy. It usually has a legal description of the insured parcel. If that doesn't work, I suggest a visit to the title insurance company that insured your title when you bought your townhouse. Most title insurers have duplicate "title plant" records, just the same as the official county or city title records.

DEAR BOB: As a real estate agent, I am annoyed by your constant put-downs of real estate agents and brokers, especially regarding unnecessary junk fees, as you call them. It seems all right with you for the public to negotiate the sales commissions charged to sell their properties. Sellers offer us 3.5 percent or 4 percent. "If you don't take it, the next agent will," seems to be their thinking. Why then can't my agents attempt to recapture some of that lost revenue by negotiating a transaction fee or administration fee? Stop trying to make us agents the bad guys. My agents go on a listing appointment and are confronted by sellers who saw your article. -- Peter M.

DEAR PETER: I have nothing but the highest respect for real estate sales agents and brokers. Personally, I've been a licensed broker for 38 years, although I no longer list and sell properties.

In the past few years, some brokerage managers have instructed their sales agents to require sellers to pay, in addition to the sales commission, a transaction or administration fee. These fees range from $195 to as high as $595, in addition to the sales commission.

If a home seller agrees to pay such a fee, in addition to the percentage sales commission, as part of the listing contract, that's fine. However, with the high sales prices of homes, which result in automatically increased brokerage sales commission, home sellers resent being charged additional fees on top of the generous commission.

Mortgage lenders are notorious for attempting to charge "junk" fees, which were not disclosed to borrowers in the badly misnamed "good faith estimate" of loan charges. Now, some real estate brokerages are attempting to add similar last-minute transaction and administration fees, in addition to their sales commission.

As you know, these add-on fees go to the broker, not the sales agents. In other words, they increase the broker's profit, which already comes from part of the sales commission. If you expect referrals from satisfied home sellers, I suggest you drop the unnecessary transaction and administration junk fees on top of the sales commissions.

DEAR BOB: Several months ago we signed a contract to buy a new house that was supposed to be finished by Dec. 1. Shortly after the framing was completed, my wife and I went by to inspect our house. The builder was not happy to see us and claimed his insurance wouldn't cover us if we were injured on the property. We continued to look around and we discovered two major errors that do not conform to the plans we received. The builder refused to correct them until after my lawyer wrote him a strong letter. Now we are concerned and want to hire a professional inspector to check the house before he plumbing and wiring are covered up. Do we have a legal right to inspect?

-- Herb R.

DEAR HERB: Probably not. Most home builders use non-negotiable printed contracts prepared by their lawyers. Although these contracts usually don't permit professional inspections, neither do they prohibit them.

However, I hasten to add the best home builders encourage buyer inspections during construction, such as after the framing is complete but before the Sheetrock is installed. Because you already found several builder errors, I suggest you continue inspecting your new home during construction but without becoming a pest. Bring your professional inspector along. Try to be extremely friendly with the builder.

DEAR BOB: My bank and brokerage accounts have "payable upon death" provisions, which avoid probate after I die. Why can't my real estate also have "payable upon death" provisions in the deed to avoid probate? -- Beth C.

DEAR BETH: A few states allow "payable upon death" clauses in deeds, but this can lead to problems. For example, suppose your home's deed leaves your home to your brother, but he dies before you. Who will then receive title to your home when you pass on if the deed says it goes to your now-deceased brother?

Or suppose you and your brother have a disagreement and you no longer want him to receive your house when you die. Unless you change the "payable upon death" provision, the house will still go to him.

The best way to avoid probate and be sure your real estate and other major assets go to those you want to receive them is to have a revocable living trust that includes your major assets. A living trust can be easily amended as many times as you wish.

Unlike a will, which requires probate costs and delays in most situations, a living trust avoids probate costs and delays.

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