DEAR BOB: As you have suggested a zillion times over the years, my mother transferred the title to her luxury condo into her living trust. I was her successor trustee and her only heir. She passed away last February. As you said it would be, transferring title into my name without probate was easy (although I wasted about $750 for an attorney to advise me). But my question involves the “stepped-up basis” for inherited property. I decided to sell the condo. The net sales price in June was about $665,000. However, mother only paid $220,000 for her 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.
DEAR DENISE: I’m glad to learn your mother’s living trust avoided probate court costs and delays for you. That is the primary living-trust purpose.
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But a secondary purpose is you, as successor trustee, could have managed her living-trust assets if your mother became incapacitated, such as by Alzheimer’s disease or a severe stroke, before she died.
Holding title to your late mother’s condo in her living trust didn’t have any effect on a new stepped-up basis to market value. 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 gain or tax to pay. More details are in my special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com.
NO SPECIAL TAX BREAKS FOR THE SALE OF SECOND HOMES
DEAR BOB: In September or October we plan to sell our summer home that we have owned more than 25 years. It has been a wonderful place for our children, but the maintenance is getting too costly. Our nice problem is it will sell for around $400,000, although we only paid $37,000 for it many years ago. Can we make a tax-deferred exchange to avoid the huge tax? – Ralph R.
DEAR RALPH: No. 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 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 home 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. For full details, please consult your tax adviser.
CAN HOMEOWNERS SET UP THEIR OWN LIVING TRUST?
DEAR BOB: Is it possible for my husband and myself to set up our own living trust for our home? – Karlyn G.
DEAR KARLYN: Yes, you can set up your living trust yourself. But please 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 great book to read first is “Make Your Own Living Trust” by attorney Denis Clifford (Nolo Press, Berkeley). It is available in stock or by special order at local bookstores, public libraries, and www.amazon.com. The book includes a CD-ROM of instructions.
SHOULD CONDO ASSOCIATION SPEND 50 PERCENT OF RESERVES ON LANDSCAPING?
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 will 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 only $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 large association’s reserves so low is very 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.
WHY AREN’T HOME INSPECTIONS REQUIRED BY LAW?
DEAR BOB: Why aren’t the professional home inspections you often recommend required by law? We recently bought our first home. It is only about 4 years old. Our buyer’s agent told us what a fantastic deal she negotiated. But then I remembered your articles about home inspections. She said we didn’t need an inspection on a 4-year-old townhouse. But I insisted. We hired an ASHI inspector, as you recommend, who pointed out the musty smell was due to water underneath the house. He showed us how the water was draining toward the townhouse instead of away. Although it 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. But I am shocked your buyer’s agent discouraged such an inspection.
Some agents fear inspections will “kill the deal.” However, it’s better to discover home defects before purchase, rather than after. Readers who want to find local ASHI (American Society of Home Inspectors) members can go to www.ashi.com.
NO EASY WAY TO GET YOUR NAME OFF MORTGAGE PAPERS
DEAR BOB: About four years ago I stupidly co-signed the mortgage papers so my brother could buy a condo. I knew he was a “playboy” who was irresponsible, but I thought he would reform after he became a homeowner. Wrong! 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 over $10,000. As a result of his late mortgage payments, he has ruined my FICO (Fair, Isaac and Co.) credit score. What can I do to get my name off his mortgage? I already 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 co-signers should either refuse or be extremely reluctant to help irresponsible buyers like your brother purchase real estate. Since your brother’s credit is presumably very bad, the best thing you can do is encourage him to either shape up or sell his condo.
ARE “OPTION MORTGAGES” A GOOD OR BAD DEAL?
DEAR BOB: What do you think of the new “option mortgages?” I am thinking of refinancing with an option mortgage. Then I would 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 only plan to keep your home a few years, the interest only option keeps your monthly mortgage payments at rock bottom. Another advantage is 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 home equity by paying down the mortgage balance. Then you can choose the fully amortized monthly payment.
But please watch out for option mortgages, which 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.
The new Robert Bruss special report, “The 10 Key Questions Condo Sellers Hope Their Buyers Don’t Ask,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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