DEAR BOB: About two years ago, I set up a revocable living trust and placed my checking, savings and stock brokerage accounts in it. But I recently realized the title to my condominium is not in my living trust. What must I do to place my condo into my living trust to avoid probate when I pass on? –Larry T.
DEAR LARRY: You are not alone. Millions of homeowners create their revocable living trusts to avoid probate costs and delays for their heirs but they forget to “fund” it with title to their homes.
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This is especially important if you own real estate in more than one state, otherwise probate will be required in each state where your properties are located.
The easiest way to transfer title to your condo into your living trust is to sign a notarized quitclaim deed in recordable form from yourself to yourself as trustee of your living trust. Then record it with the local recorder of deeds.
To be recordable, the quitclaim deed must usually include the legal description of your property, the local parcel number and your notarized signature. The easiest place to find your condo legal description and parcel number is on your owner’s title insurance policy.
SHOULD HOME SELLER REPLACE STAINED CARPET?
DEAR BOB: We plan to sell our home, which has worn and stained carpet. Professional cleaning won’t remove the stains. A friend suggests we just clean the carpet as best we can and offer a credit to the buyers so they can select their own carpet color. But I worry that is not putting the best face on our house and the carpet might turn off potential buyers. What do you suggest? –Penny S.
DEAR PENNY: You are correct. Replace that worn, stained carpet. Your friend is mistaken. Always get a house or condo into its best possible condition before offering it on the market for sale. Painting, cleaning and repairing are the most profitable.
Discounts don’t work. But don’t go overboard with major renovations. Spending a few hundred, or even a few thousand, dollars on new carpet will pay off.
Most home buyers have zero imagination about how nice your home will look with new carpet. Avoid what I call “cheap-spec-house dark brown” or any other color except light beige carpet.
You don’t have to buy top-of-the-line new carpet, but don’t install the cheapest carpet either. Most important, be sure to install a good-quality, new rebond pad, which makes the new carpet comfortable to walk on to put your prospective buyers in a good mood.
MUST HOME SELLER DISCLOSE REPAIRED DAMAGE?
DEAR BOB: I own a condominium that suffered water damage about six months ago from the upstairs condo when a pipe in the wall sprang a leak. The condominium homeowner’s association paid for extensive repairs to my bathroom. Do I have to disclose this to my buyer? –Derek S.
DEAR DEREK: No. Unless the damage was not completely repaired, or there is evidence of the need for additional repairs, you don’t have to disclose what happened in the past. If homeowners were required to disclose all past repairs, the list for most homes would be a mile long.
All you must disclose are current defects and problems that have a material effect on the market value or desirability of your home. For more details, please consult a local real estate attorney.
WHY DOES EACH MORTGAGE LENDER HIRE ITS OWN APPRAISER?
DEAR BOB: I am in the process of buying a house. The seller accepted my purchase offer but the sale won’t close for 60 days because the seller needs extra time to move her “stuff.” However, that’s good for me so I can shop for the best mortgage. The first lender, the bank where I have done business at least 10 years, was very arrogant. They insisted on a $250 appraisal fee, which I paid. The appraisal came in at exactly the sales price. When I questioned the loan officer, he said appraisers are instructed never to estimate a market value higher than the sales price (although I know I got a bargain price below market value). Because I have plenty of time, I continued mortgage shopping and found a much better deal with another lender. But the second lender refuses to accept my copy of the first appraisal and insists I pay $300 for a second appraisal from a different appraiser. Is this legal? –Beth W.
DEAR BETH: Congratulations on being a savvy mortgage shopper. As you have discovered, mortgage lenders hire the appraisers, not the borrower. A second mortgage lender will rarely accept an appraisal ordered by the first mortgage lender because of nonsense professional appraisal rules.
The result is you, the borrower, get stuck paying a second appraisal fee. However, if you found a much better mortgage, paying a $300 second appraisal fee is very worthwhile.
REALTOR DOESN’T SET HOME VALUE, THE MARKET DOES
DEAR BOB: We are in the process of selling our home. Now I see why you suggest interviewing at least three successful local Realtors before listing with the best one. So far, we interviewed three Realtors and they each provided us with CMA (comparative market analysis) forms, as you said they would. However, they used mostly different comparable recent home sales in our area. We have a “run of the mill” house with nothing unique but in a very desirable neighborhood. The Realtors set the market value of our home at $475,500, $560,000 and $625,000. These are all experienced, longtime local Realtors. How can they set the market value of our home so far apart? –Joseph H.
DEAR JOSEPH: That is amazing. But you should be aware the Realtor doesn’t set the market value for your home — the local market does.
Something is seriously wrong with those CMAs, especially if they didn’t use the same recent sales prices of similar nearby homes in your vicinity.
You should be aware it is possible one of those agents tried to “buy” your listing by estimating a high market value and another estimated a low market value, hoping to make a quick easy sale. I suggest you keep interviewing more agents before selecting the best agent to receive your 90-day listing.
NO TAX-DEFERRED EXCHANGE FOR A PERSONAL RESIDENCE
DEAR BOB: My house, which I now want to sell, was rented to tenants between 2000 and 2004. I moved back 26 months ago. Can I still do a Starker tax-deferred exchange? If not, would there be any benefit to carry back the mortgage for my buyer? I am single, if that makes a difference –Lisa Z.
DEAR LISA: Sorry, you don’t qualify for an Internal Revenue Code 1031 tax-deferred exchange. The reason is the property is your personal residence, not a rental or business property.
To make the property eligible for a tax-deferred exchange, you must move out and rent the property to a tenant.
However, because your property is currently eligible for an Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 for a single homeowner, that might be your best choice.
If you carry back the mortgage for your buyer, that is called an installment sale. It will spread out your profit tax over the life of the mortgage payments you receive.
The capital gain portion of each payment you receive will be taxed at the current federal 15 percent tax rate, plus applicable state tax. Of course, the interest income you receive is taxable as ordinary income. For full details, please consult your tax adviser.
INHERITING REAL ESTATE IS BETTER THAN RECEIVING IT AS A GIFT
DEAR BOB: I saw in a recent item you said it was bad to inherit real estate because of the reduced cost basis. Are you saying inheritance is a bad thing? Please explain why you said “stepped-up basis” is better –Chandler B.
DEAR CHANDLER: You misunderstood. I often say it is better to inherit real estate than to receive it as a gift before death. The reason is when you inherit real estate from a deceased owner, you receive it with a new “stepped-up basis” of market value on the date of the decedent’s death.
If you receive a pre-death gift, as the donee you take over the donor’s usually much lower basis than the current market value.
For example, suppose your mother’s basis for her house is $50,000. It is worth $300,000 today. If she gives you a gift deed, your adjusted cost basis will be $50,000, the same as her basis.
However, if you instead inherit that same house after she passes on, your adjusted cost basis is the date of death market value at $300,000 in this example. Obviously, stepped-up basis is much better because when you eventually sell that property your capital gain tax is payable only on the increased sales price above the stepped-up basis. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Probate Property Profit Secrets Revealed,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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