DEAR BOB: I’ve been reading your articles for at least five years and have learned so much about real estate. Once, when the editor left your column out of the newspaper, I phoned and strongly complained. The editor never made that mistake again. But now I need your help. I recently sold my home tax-free, thanks to Internal Revenue Code 121, which you explained many times. However, I am now considering buying a lovely townhouse in a brand-new development. Thanks to my home sale, I have the cash to buy the townhouse without a mortgage. But you often suggest home buyers obtain a mortgage even when they can afford to pay all cash. Why? – Evelyn W.
DEAR EVELYN: Thank you for your kind comments. The reason I suggest not paying all cash for a home, especially a brand-new condo or townhouse, is that it could be a very risky situation, and I don’t want you tying up a large portion of your assets.
There are often major construction defects in new condominium and townhouse developments. If the builder doesn’t correct them, the homeowner’s association frequently gets involved in litigation. The result can be owners are “stuck” and unable to sell because most mortgage lenders refuse to make loans when a lawsuit is pending.
Perhaps you recall the letter in this column from the widow who bought a condo for cash. Then she discovered her condo had several severe defects and the complex was occupied mostly by renters. She wanted to move out. But when she tried to sell, she discovered mortgage lenders wouldn’t make loans in the complex because about 50 percent of the units were occupied by renters.
I could go on, but you get the idea. Please don’t invest all your cash into your home purchase. Make a reasonable down payment, such as 20 or 25 percent. After a few years of living in your new townhouse, if all goes well, then you can pay off the mortgage. But if there are unexpected problems, you won’t be stuck in a bad situation.
NO MINIMUM HOLDING TIME FOR A TAX-DEFERRED EXCHANGE
DEAR BOB: About six months ago, I bought a house as a rental investment. I fixed it up nicely but have not been able to obtain qualified renters. Local Realtors tell me most prospective renters who can qualify for today’s low mortgage interest rates have bought their own homes. Due to lack of qualified renters, I am considering selling the house I originally bought as an investment property. As I will have a substantial resale profit, is there any minimum holding time to qualify for an Internal Revenue Code 1031 tax-deferred exchange? – Mike A.
DEAR MIKE: No. Internal Revenue Code 1031 has no minimum holding time to qualify for a tax-deferred exchange. Your intent at the time of purchase was clearly to rent that house as an investment.
However, when “plan A” didn’t work out, it’s time for “plan B” to sell the house and defer the capital gain tax by use of a Starker tax-deferred exchange for another qualifying investment property. Ask your tax adviser for full details.
IT’S LAWSUIT TIME WHEN LIVING TRUST TRUSTEE BREACHES DUTY
DEAR BOB: About eight months before my mother died, she had a severe stroke. My sister moved mom in with her. She also sold mom’s house and took all the furnishings. The money from the sale was never disclosed to me. Mother’s bank accounts were also closed, including the ones on which I was a co-owner. My sister refuses to discuss this with me. After mother died, I asked my sister for a copy of her living trust. I still have not received a response. Shouldn’t I have received a copy of mom’s living trust and an accounting because I know I was to inherit half of her assets along with my sister? – Sharon H.
DEAR SHARON: A living trust beneficiary has a legal right to an accounting for the assets after the trustor has passed on. However, if your mother sold her house before she died, even though it was in her living trust, she could do so if she was mentally competent and she was entitled to receive those sales proceeds.
To be certain your sister didn’t take advantage of the situation to your detriment, since she refuses to account to you, please retain a local probate attorney.
NO TAX DUE WHEN MOVING INTO TAX-DEFERRED EXCHANGE HOME
DEAR BOB: Did I make a tax mistake? Will I owe tax? In 2000, using Internal Revenue Code 1031, I exchanged my rental property for another rental property. But in 2003, due to loss of my job and a divorce, I moved into the property I acquired in the tax-deferred exchange. My friend says I changed the character of the property and should declare the deferred gain (about $250,000) on my 2003 income tax return. But I feel this was a rental property when I acquired it so I shouldn’t owe any tax until I sell it – Jeff S.
DEAR JEFF: Without knowing it, you are a tax genius.
You clearly made an Internal Revenue Code 1031 tax-deferred exchange in 2000. When you moved into that investment property and made it your residence in 2003, you converted it from investment to personal residence property. However, that is not a taxable event because there was no property sale.
Your friend is mistaken. You are correct. No tax issue arises until you sell. For full details, please consult your tax adviser.
WHERE TO FIND A REVERSE MORTGAGE LENDER
DEAR BOB: I am 72 and my wife is 68. We own our home free and clear. But we need more income. Our retirement mutual fund investments have “tanked” and the income we counted on isn’t there. A friend at the local senior citizens center said he read in your articles about reverse mortgages. But my local banker acted as if I lost my mind when I inquired about a reverse mortgage. Which banks make reverse mortgage loans so we can increase our retirement income? – Henry H.
DEAR HENRY: You and your wife are perfect reverse mortgage candidates. But you will have to choose monthly lifetime income, a lump sum, a credit line (except in Texas) or any income combination.. However, the only nationwide bank originating reverse mortgages is Wells Fargo.
If that bank doesn’t have a nearby office, just go on the Internet to www.reversemortgage.org to find reverse mortgage lenders in your vicinity. If you are not yet Internet savvy, your public library reference librarian will be glad to help you find that website at the library.
PRE-NUPTIAL AGREEMENT RECOMMENDED BEFORE MARRIAGE
DEAR BOB: My 33-year old niece is the sole owner of her home. She is planning to marry soon. Both her parents and her fiancé’s parents are divorced so that statistically paints a bleak picture for the success of their marriage. After she is married, she wants to keep her home as her separate property. Her fiancé is in agreement. How can this be accomplished? – Greg S.
DEAR GREG: The easy solution is for your niece to have a pre-nuptial agreement prepared by her attorney. This is a simple agreement stating whatever assets she and her fiancé own before the wedding are to remain their separate property.
Her fiancé should be represented by his own attorney to review the pre-nuptial agreement. This is extremely important, in case a divorce occurs, so he can’t say he didn’t understand what he was signing.
After the marriage, each spouse should keep his/her separate assets, such as that home, completely separate. If they use their earnings to pay for the upkeep or improvements on each other’s assets, if a divorce occurs then the pre-nuptial agreement might have been violated. I realize it takes the romance out of the wedding, but please be sure there is a pre-nuptial agreement and each future spouse is represented by his/her own attorney.
PARTITION SALE CAN FORCE SALE OF A HOUSE
DEAR BOB: I am a one-third owner of a house with my two sisters in joint tenancy. There is no mortgage. They want to sell. I don’t. Can they legally sell without notification to me? – Dorothy W.
DEAR DOROTHY: No. Your signature is required on the deed. However, your two sisters can sue you in a court partition lawsuit to force the sale of the property. Unless you convince the judge not to order the sale of the property, you will probably lose. For full details, please consult a local real estate attorney.
The new Robert Bruss special report, “2004 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” 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.
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