QDEAR BOB: We recently signed a purchase contract to buy a house, using $25,000 as the required deposit. A week later, after working our mortgage payment numbers, we found we could not afford to buy it. After many sleepless nights, we told our real estate agent we had to back out of the contract. What are we responsible for? Could we lose our deposit? Can other action be taken against us? -- Robert P.

ADEAR ROBERT: Your situation should be a lesson to all prospective home buyers to know what you can afford before signing a purchase contract.

It sounds like you have a severe case of "buyer's remorse," which could have been prevented if you were preapproved in writing by a mortgage lender. The lender wouldn't approve a mortgage you can't afford.

After your default, your home seller has a legal obligation to mitigate damages. That means the seller and the listing agent must try to sell the home for the same or better price and terms than you offered. If that isn't possible, you could be held liable for the seller's damages.

Depending on the wording of the sales contract, you might be liable for loss of the entire $25,000 good-faith deposit. However, if the sales contract says the deposit is agreed to be "liquidated damages" in the event of the buyer's default, then you can't be held liable for any additional damages. Consult a lawyer for details.

DEAR BOB: Can you recommend a couple of good real estate books to help me get started investing in real estate? -- Rick L.

DEAR RICK: Although you didn't indicate what type of real estate investments you prefer, I suggest you start with single-family houses and small income properties.

I highly recommend these recent books by successful investors: "Building Wealth One House at a Time," by John W. Schaub, and "Start Small, Profit Big in Real Estate," by Jay P. DeCima.

DEAR BOB: My daughter rents a townhouse that the landlord wants to sell. She wants to buy it, but she has no money for a down payment and her debts preclude her from getting a mortgage for at least a year. The landlord has agreed to continue renting to her for a year if she wants to stay. I suggested that she ask him to sell to her and carry back the mortgage for a year until she can get a mortgage from a bank. The landlord is asking $89,000, but the townhouse, which is in a good neighborhood, is probably worth much more. What is the best way to handle this situation? -- Mae LeB.

DEAR MAE: Presuming that the landlord owns the townhouse free and clear with no mortgage and that the landlord likes and trusts your daughter, ask him to carry back the mortgage for several years rather than just 12 months.

That will give your daughter adequate time to get her financial house in order before she applies for a home loan from an institutional lender. Seller financing is always the best way to buy a home. But a one-year mortgage is highly risky for your daughter.

DEAR BOB: I recently "flipped" two brand-new condos, buying and selling them within four months. How do I calculate my adjusted cost and my adjusted sales price? Should I include my purchase price, mortgage interest, homeowners association dues, property taxes and monthly utilities? When calculating my adjusted net sales price, can I deduct the closing costs and the real estate agent's sales commission? -- Kasen T.

DEAR KASEN: Congratulations on your profitable "flipper" transactions. The only unfortunate part is that your profit is fully taxable as ordinary income because you did not hold title over 12 months to qualify for a long-term capital gain.

When calculating your adjusted cost basis, you include the purchase price and capitalize the closing costs that were not tax-deductible at the time of purchase. As for your carrying costs, such as mortgage interest, homeowners association dues, property taxes and monthly utilities, they should be deducted on Schedule E or C of your income tax returns.

As for determining your adjusted or net sales price, the real estate agent's sales commission and closing costs are subtracted from the gross sales price. Then subtract your adjusted cost basis from the adjusted sales price to determine your taxable ordinary gain.

DEAR BOB: My wife and I bought our home in May 2004 and have lived in it since then. If we sell now, can we avoid paying capital-gains tax on our sale profit? -- Walter B.

DEAR WALTER: If you sell your principal residence after less than 24 months of ownership and occupancy during the 60 months before its sale, Internal Revenue Code 121 says you are not eligible for tax-free profits up to $250,000 (up to $500,000 for a qualified married couple filing jointly).

However, you might be entitled to a partial exemption (75 percent in your situation) based on occupancy for 18 months.

To qualify for the partial exemption, your principal residence sale must be due to health reasons; change of employment location, which qualifies for the moving expense tax deduction; or unforeseen circumstances, such as divorce, death in immediate family, unemployment, multiple births from the same pregnancy, residence damage from natural or man-made disaster, and condemnation or involuntary conversion.

DEAR BOB: We own a rental house that we want to sell so we can acquire another rental property. We cannot sell until the lease expires in March 2006. However, we have already found another suitable rental property -- and the seller wants to close by November 2005. Can we do an Internal Revenue Code 1031 tax-deferred exchange? -- Alvin D.

DEAR ALVIN: Yes. The situation you describe, in which the replacement rental property is acquired before the old rental property is sold, is called a "reverse tax-deferred exchange." It is perfectly legal under Internal Revenue Code 1031.

However, you can't take title to the replacement property in your name until you sell your current rental property. Title must be taken in the name of the third-party intermediary who will handle your IRC 1031 tax-deferred exchange. Consult a tax adviser for details.

DEAR BOB: My mom's part-time home health aide, a single mother who earns $9 an hour, wants to go back to school full time to become a registered nurse. She has asked my advice on selling or refinancing her townhouse so she can afford the tuition and living expenses. She and her former boyfriend bought the townhouse about seven years ago; both names are on the deed and the mortgage. He moved out about six years ago and told her she could keep the house. She has not been able to contact him. What does she need to do to get his name off the title and the mortgage? -- Fran A.

DEAR FRAN: She should hire an experienced local real estate lawyer in the county where the property is to determine her best course of action. The lawyer may recommend bringing a quiet title lawsuit to remove the missing co-owner's name from the townhouse title.

Because the whereabouts of that person is unknown, the local court will probably approve "service by publication." That means a legal notice is printed in the local newspaper informing the missing owner that he is being sued and must appear in court or his legal rights could be determined without his presence.

The judge might not be willing to immediately terminate the missing co-owner's rights; he or she might order the townhouse sold (called a partition action) with half of the proceeds held in trust for the missing co-owner. That's why your friend should consult a lawyer.

DEAR BOB: While searching for a house to buy, we found a desirable new community that requires that we use the builder's mortgage lender for financing. But its rates seem high. Is this practice legal, or can we use another lender? -- Lester G.

DEAR LESTER: Don't be intimidated by the home builder who will receive an extra profit if you use his mortgage company. In most states, a builder cannot require the buyer to use a builder-related lender or closing settlement firm.

However, don't be too hasty to reject the builder's mortgage finance terms. Shop around among other lenders, such as your bank and credit union, to be sure of their exact mortgage details. Then compare those terms with what the builder's finance department offers. Maybe there are some advantages to using the builder's lender.

DEAR BOB: Someone is buying my home on a rent with option to buy. She will forfeit $30,000 if she does not go through with the purchase at the end of the lease. I am asking her to pay the property tax and insurance while leasing. Can I also ask her to take care of any repairs while she leases? -- Maria F.

DEAR MARIA: Yes, you can ask whatever you want. Whether the tenant-buyer will agree to pay the repair costs during the lease-option period is up to her.

What if the roof starts leaking? Would it be fair to ask your lease-option tenant to pay for an entire new roof?

I have been a frequent user of lease options, both as a buyer and seller. Only once have I, as a buyer, agreed to pay for the seller's repairs. That was a 15-year lease option at a fixed purchase price, so I didn't mind paying all the expenses. As it turned out, I had to install a new roof. But the situation was such a bargain that I still had a good deal.

DEAR BOB: We own a vacation home, which has greatly appreciated in market value. This year, we used it only about six weeks total. As we are getting on in age, we are thinking of selling. But our profit will be around $350,000. How can we avoid paying tax on this profit? -- Edward R.

DEAR EDWARD: Based on what you've told me, you can't avoid capital-gains tax. Part-time vacation homes qualify for neither the Internal Revenue Code 121 principal-residence-sale $250,000 exemption nor the Code 1031 tax-deferred exchange.

However, before selling, you could convert your vacation property into either (1) your full-time principal residence for at least 24 of the 60 months before its sale to qualify for the $250,000 exemption ($500,000 for a qualified married couple filing jointly) or (2) a rental property qualified for an IRC 1031 tax-deferred exchange. Consult a tax adviser for details.

DEAR BOB: We are first-time home buyers. Several weeks ago, we made a written purchase offer through the home's listing agent. She seemed helpful as she prepared our purchase offer. As novices, we didn't question her when she said, "It's standard to make purchase offers good for a week." So we agreed. During that week, we waited to hear from the listing agent. After waiting eight days, I phoned her. She said, "I'm sorry, but yesterday a better offer was accepted by the seller." Should we sue her for not representing us properly? -- Niam R.

DEAR NIAM: No. Don't waste your time dealing with that dishonest listing agent who breached her fiduciary duty to you. But we can all learn from your sad situation.

Your first mistake was not having your own buyer's agent representing you. It does not cost a buyer anything extra to have his or her own agent because the two agents will split the sales commission. A buyer's agent would have made your purchase offer valid for not longer than 24 hours. This prevents "offer shopping," which is obviously what happened.

Your second mistake was making your purchase offer valid for a week. The listing agent clearly intended to shop your offer for a week and recommend that the seller accept your offer only if a better offer could not be obtained.

DEAR BOB: After our mother died in August 2003, my brother and I inherited her assets, which consisted mainly of her house plus stocks and bonds. Her will left everything to us equally. But the estate had to go through probate court proceedings. We just recently received title to her home and listed it for sale. All this time, the house has been vacant, costing us upkeep expenses. The only good thing resulting from the probate court delay is that the house appreciated about $100,000 in market value. However, our probate attorney now tells us that we will owe capital-gains tax because our "stepped-up basis" was determined on the date of our mother's death. Why isn't there a law against this probate rip-off? -- Cindy R.

DEAR CINDY: If you are a regular reader, you know I constantly admonish readers to arrange a revocable living trust to avoid probate costs and delays for their heirs. Obviously, your mother didn't follow that advice.

I especially relate to your situation because I encountered an 18-month delay in Minnesota probate court after my mother died several years ago. She had a living trust, but her Minnesota attorney erroneously told her not to put her condominium title into it. When she died, the condo title had to go through probate. Most states have similar probate court costs and delays.

DEAR BOB: In July 2002, we bought a brand new townhouse. We had it professionally inspected, and everything appeared in good condition. But in August 2004, the slab foundation cracked. We noticed a bulge under the carpet in our living room. Immediately, we notified the builder. He said we had a one-year warranty, and the concrete slab bulged or cracked after that, so we are out of luck. Is this true? -- Bruce N.

DEAR BRUCE: The laws of most states require home builders to warrant their homes for longer than one year. You didn't report where the townhouse is located. In some states, such as California, the home builder is liable for up to 10 years for construction defects. I suggest you consult a local real estate lawyer.

DEAR BOB: Driving to work every day, I go by a run-down abandoned house. I have observed it for at least a year. One day, I stopped to jot down the address, walk around it and ask the neighbors. They said a "strange old lady" owned the house. I researched the title and learned the property taxes hadn't been paid for some time. I finally located a man who claims to be the old lady's son. He said the property is in bad shape and he could give me a quit-claim deed for $1 because he inherited the house after his mother died. Should I get involved, knowing the house needs work? -- Norman O.

DEAR NORMAN: For $1, it's hard to go wrong, unless there are recorded liabilities against the property. Before you accept that $1 quit-claim deed, consult a local title insurance company to learn if the son's quit-claim deed is insurable.

If you can buy an owner's title insurance policy for that house, you may have discovered a super bargain. However, if the title insurer tells you there are lots of unpaid liens against the property, or perhaps the son doesn't really own the property, maybe you should pass on that opportunity.

Be aware a quit-claim deed conveys only whatever title the grantor owns. If that son doesn't own the property, his quit-claim deed is worthless.

DEAR BOB: We bought our home in 2001, lived in it for seven months and then received a job transfer to Europe. The house was rented to tenants until we returned in 2003. We have lived in our home since then. It is amazing how much our home has appreciated in market value. My wife's employer has now offered her another job transfer that is too good to turn down. But the employer has no home-sale program. Can we qualify for that $500,000 exemption though we didn't live in our home for 24 continuous months? -- Craig S.

DEAR CRAIG: Yes. Internal Revenue Code 121 offers a principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly). To qualify, you and your spouse must have occupied your residence a total of at least 24 months during the 60 months before its sale. However, the occupancy need not be continuous. Consult a tax adviser for details.

Readers with questions should write to Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.

(c) 2005, Inman News Service