DEAR BOB: My mother wants to help my sister buy a modest home. I recall your writing about joint tenancy survivorship and tenancy in common for holding title. What is the best arrangement so mom can get the tax deductions for payments she makes until my sister gets on her financial feet? – Frances C.
DEAR FRANCES: Your question provides a great opportunity to compare the pros and cons of these two title methods for two or more co-owners holding title to real estate.
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Joint tenancy with right of survivorship means the surviving co-owner owns the entire property after the other joint tenant dies. All joint tenants are equal owners. A joint tenant owner’s will has no effect on joint tenancy property.
No probate proceedings are required after one joint tenant dies. In most states, the surviving joint tenant need only record a certified copy of the other joint tenant’s death certificate and an affidavit of survivorship to clear the title.
But tenant in common ownership shares can be unequal, such as 40 percent and 60 percent. Each tenant in common’s share passes according to the terms of his/her will or living trust.
Joint tenancy with right of survivorship is probably best for your mom and sister. As for the tax deductions, if your mom is on the title and she makes the payments until your sister is able to take over the payments, mom will be able to claim the tax deductions. For more details, your mom and sister should consult their tax advisers and real estate attorneys.
REALTY BROKER ADMINISTRATION FEE IRKS HOME BUYER
DEAR BOB: My home buyer’s agent, just after we made our purchase offer on a house, asked us to sign a statement saying we will pay $200 to his brokerage for administrative work. Our agent never told us he charges an administrative fee. Is this common? Do we have to pay? – Laurie M.
DEAR LAURIE: Realtor “administrative fees” are a new junk or garbage fee rip-off charged by some realty brokerages to increase their profits.
These fees go to the brokerage, not to the individual sales agent (although a few firms now give a portion of these fees to the sales agents to make them more acceptable).
If home buyers and sellers protest these unnecessary junk fees, the brokerages will stop charging them in addition to sales commissions. Unless you really like your buyer’s agent service, I would refuse to pay $200 for a fee that gives you no benefit.
DOES MORTGAGE LENDER AUTOMATICALLY GET TITLE FOR NON-PAYMENT?
DEAR BOB: We hold a mortgage that states on June 1, 2004, the entire balance shall become due and payable. Since the buyer didn’t pay the balloon payment, does the property automatically belong to us? – Michael D.
DEAR MICHAEL: No. But the exact answer depends on state law where the property is located.
Most states have a short “grace period” of 10 to 15 days for late mortgage payments during which no penalty can be assessed or foreclosure begun.
After that time, you are free to begin foreclosure to obtain title or payment in full.
If your loan security was a deed of trust, you should record a Notice of Default to begin foreclosure. However, if the security was a mortgage, which is to be foreclosed judicially in court, then a foreclosure lawsuit must be filed against the borrower.
I suggest you hire a local real estate attorney who specializes in foreclosures to handle this matter for you. Be sure to get his or her fee in writing so there is no misunderstanding.
Depending on the state where the property is located, there might be a redemption period after the foreclosure sale during which the defaulting owner can redeem the property. The result will be you will either get paid in full by the highest bidder at the foreclosure sale or you will receive title to the foreclosed property.
$250,000 HOME SALE TAX EXEMPTION DOESN’T APPLY TO INVESTOR DAD
DEAR BOB: I am co-owner with my brilliant son on a house he bought, with my cash down payment, about five years ago. He found a fixer-upper house in an inner city area of yuppies. It was a pretty rough area at that time, but it showed promise. I put up the $35,000 cash down payment and co-signed on the mortgage. My son did a fantastic fix-up job on the house, making an ugly duckling house into a beautiful swan. Meanwhile, he and his roommate lived in the house. Now he has a purchase offer, which will show about $375,000 net profit. I realize his home sale profit up to $250,000 is tax-free. But is there any way to make my profit for “dear old dad” also tax-free? – Sherman R.
DEAR SHERMAN: Sorry, but as a non-resident investor you can’t qualify for the $250,000 tax-free principal residence sale tax exemption of Internal Revenue Code 121. To qualify, you must have owned and occupied the principal residence an “aggregate” two of the five years before the sale. Your son qualifies. But you don’t. For more details, please consult your tax adviser.
SHOULD LONG-DISTANCE HOME OWNER SELL?
DEAR BOB: As I e-mail you from Barcelona, Spain, after reading your articles in my U.S. hometown newspaper via the Internet, I realize I need your expert advice. Disobeying your frequent admonitions not to own long-distance rentals, when I moved here on a “temporary” six-month assignment from my employer, I hired a local Realtor to manage my U.S. house, collect the rent and pay the bills. “Temporary” turned into more than two years, with no end in sight. But I love living in Barcelona. My Realtor property manager tells me the local rental market for my vacant house is “difficult.” However, she says the local sales market is very strong and recommends selling. What would you do? – Jeanie R.
DEAR JEANIE: Unless you plan to someday return to your former residence, sell now. The rental market for houses and apartments is very weak in many communities, primarily due to the low mortgage interest rates and easy home-loan qualifications. That has depleted the supply of quality renters for houses like yours.
Please be aware of the ticking clock of Internal Revenue Code 121. If you still meet the two-out-of-the-last-five-years ownership and occupancy test, then up to $250,000 of your former principal residence sale profit will be tax-free. For more details, please consult your tax adviser.
DON’T GIVE AWAY REAL ESTATE WITHOUT A VERY GOOD REASON
DEAR BOB: I own a summer home in Indiana, which I bought for $64,000 in 1985. If I leave it to my son as a beneficiary, will he have to pay the capital gains tax on it? It is worth about $250,000 today – Sam M.
DEAR SAM: As I often say in this column, it is better to inherit property than to receive it as a gift before the owner’s death.
The primary reason is inherited property receives a new stepped-up basis of market value on the date of the owner’s death. No capital gains tax will usually be due if the property is sold soon thereafter.
If you give the property to your son before you die, he then takes over your low, $64,000 adjusted cost basis. He would incur a substantial capital gains tax when he sells. For full details, please consult your tax adviser.
GREAT ADVICE PAID OFF FOR RETIREES
DEAR BOB: Thank you for your great advice several years ago to retirees like us. You said don’t buy a retirement home for cash even if you can afford to do so. As a result, we bought our retirement condo for 10 percent down payment with a 90 percent mortgage. Although we love our condo, the homeowner’s association mismanagement is a disaster. I won’t bore you with the details, but the developer took advantage of us. The construction defects are outrageous. Many buyers have rented their condos to what I call the “dregs of society.” If worse comes to worse, my wife and I will default on our mortgage and walk away. We are so thankful we didn’t invest our retirement nest egg into what outwardly looks like a great condo complex but inwardly is a disaster – Stephen B.
DEAR STEPHEN: Thank you for sharing your experience. Now you know why I constantly suggest retirees not pay all cash for their retirement homes, just in case the situation goes bad, as it did in your unfortunate condo complex.
The new Robert Bruss special report, “Ten Easy Profit Techniques for Your Home and Investment Property,” 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 download at www.bobbruss.com.
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