DEAR BOB: I am considering selling a rental house I own. My plan is to invest the sales proceeds into another rental house I own to improve it, also paying down the mortgage balance. Will this qualify as a tax-deferred exchange? It seems to comply with the “spirit of the law” – Doug W.
DEAR DOUG: Because you already own the rental property you want to improve and pay down its mortgage balance, it cannot qualify for an Internal Revenue Code 1031 tax-deferred exchange. Forget about your “spirit of the law” silly idea. IRS revenue agents don’t think like that.
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IRC 1031 requires you to acquire a qualifying “like kind” rental or investment property of equal or greater market value without receiving any taxable “boot,” such as cash or net mortgage relief. For more details, please consult your tax adviser.
HOW MANY IS TOO MANY CONDO RENTALS?
DEAR BOB: Some time ago you gave a formula for calculating the maximum number of rentals in a condo complex. What is that formula? – Jim W.
DEAR JIM: There is no “formula” for determining when there are too many rentals in a condo complex. Fannie Mae and Freddie Mac, the nation’s largest secondary mortgage market buyers of home loans, usually will not buy a condo loan if more than 30 percent of the units in the complex are rentals.
When there are more than 25 percent rentals, many lenders charge higher-than-normal interest rates. The reason is absentee condo owners usually vote against assessment increases to pay for repairs and maintenance.
Another problem is renters usually don’t take as good care of the property as do owner-occupants.
The foreclosure rates on condos where more than 25 percent of the units are rentals are usually much higher than where most of the condos are owner-occupied. I recommend not buying a condo in a complex where more than 10 percent of the units are rentals.
PROS AND CONS OF MORTGAGE ESCROW ACCOUNTS
DEAR BOB: Why are you opposed to mortgage escrow accounts for property taxes and insurance? If I get rid of my escrow account, will my monthly payment be lower? – Keisha R.
DEAR KEISHA: When properly serviced by a mortgage lender, escrow accounts for property taxes and/or insurance premiums are great. But so many problems develop with loan servicers that I can’t recommend escrow accounts.
Lenders often overcollect, make mistakes and forget to pay the taxes and/or insurance bills on time. Worse, many dishonest lenders who make late payments even take the late fees from the escrow accounts without telling their borrowers.
If you already have an escrow account with your mortgage, and if your lender is properly servicing it, leave it alone. However, if you spot any irregularity, then it’s time to get tough with your lender.
Canceling your mortgage escrow account, however, won’t save any money because you still must pay your property taxes and insurance.
The new Robert Bruss special report, “Ten Easy Profit Methods 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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