DEAR BOB: I read your recent response to that reader saying a married couple can qualify for the full $500,000 principal residence sale tax exemption even if only one spouse held title. My mother is soon going to sell her house where she has lived for 23 years. She is getting married this month. If she sells her house after the wedding, can she qualify for the full $500,000 tax break? Her Realtor says that because her new husband never lived in the house, she only qualifies for $250,000 tax-free. Is he right? – Stephanie R.
DEAR STEPHANIE: The Realtor is correct. Internal Revenue Code 121 only requires one spouse’s name to be on the title of the principal residence being sold to claim the full $500,000 exemption (instead of just $250,000 for a single home seller). But both spouses must meet the two-out-of-last-five-years occupancy test.
Purchase Bob Bruss reports online.
Since your mother qualifies but her new spouse hasn’t lived in the principal residence an “aggregate” two of the last five years, she can only qualify for up to $250,000 tax-free profits. For full details, she should consult her tax adviser.
HOME BUILDER UPGRADE DISCOUNT PROVES VERY EXPENSIVE
DEAR BOB: We opted for upgrades that our home builder offered at a discount price if we borrowed from the builder-owned mortgage company. The sales agent verbally assured us our mortgage rate would be no higher than one-eighth percent over the market rate. But now we discovered our mortgage is about one-half percent higher than market rate. We have excellent credit and have shopped among other lenders to discover we qualify for the lowest rate. But the purchase price of our house will go up about $20,000 if we do not finance with the builder’s mortgage company, which refuses to offer a competitive rate. What should we do? – Priya R.
DEAR PRIYA R: In real estate, as you discovered, a sales agent’s verbal statement means nothing. To be enforceable, any real estate promises or agreements must be in writing and properly signed.
Be sure your new home loan from the builder’s mortgage company does not contain a prepayment penalty. Then you can refinance with a lower-interest-rate lender after your home purchase closes.
If the builder’s loan is one-half percent higher than the market rate, that means your so-called discount on the builder’s upgrades will be very expensive unless you soon refinance with another lender to lower your interest rate.
HOW MUCH INSURANCE SHOULD HOMEOWNER CARRY?
DEAR BOB: My husband and I have both been married before. He has his investments and I have mine separately. We are of modest means and are both retired. Because of the divorce settlement and an inheritance, the home we live in is in my name alone. What worries me is, on occasion, my husband drinks too much when he is with his buddies. He then drives across town to come home. I have brought this to his attention that he could injure himself and possibly injure or even kill someone else. I am afraid of losing my home in a lawsuit. We have proper insurance on our vehicles. Even if the home is in my name alone, can this happen? – Connie A.
DEAR CONNIE: Under the circumstances, you are very wise to keep the title to your house in your name alone. If you add your husband’s name to the house title, and if your husband gets a court judgment rendered against him, depending on state law the house equity might be subject to execution on that judgment.
Should your husband become involved in an accident and if his auto insurance is inadequate to pay a court judgment for negligence, the injured plaintiff might try to enforce that judgment against your house. But, in most states, such an attempt would fail because the house is your separate property.
Even in a community property state, since you owned the house as your separate property before the marriage, it remains your separate property unless your husband contributes to it financially.
My suggestion is to review your insurance protection with several insurance agents (not stating the reason for your concern, of course).
To illustrate, my insurance agent recommends I carry $300,000 liability insurance on each property, and on my car, plus a $2 million “umbrella liability” policy, which would apply to any negligence judgment against me over $300,000. For more details, please consult a local real estate attorney and several insurance agents.
HOW CAN HOMEOWNER GET RID OF P.M.I.?
DEAR BOB: I have been paying my PMI (private mortgage insurance) fees on my home mortgage for over two years. I just phoned my lender and was told I must have a loan-to-value ratio of 75 percent (not the 80 percent I anticipated) to cancel PMI. I was also told I must get an appraisal from a recognized appraiser. Some time ago, you suggested borrowers file lawsuits in Small Claims Court to get rid of PMI. At what point should I sue my lender and for how much? – Stefan C.
DEAR STEFAN: PMI enabled you to buy your home for little or no cash down payment. In return, you had to pay the PMI monthly premiums, which protected your mortgage lender on the top 20 percent in case of your loan default loss.
First, get a professional appraisal of your home from a licensed appraiser. Ask your lender for names of its recommended appraisers in your area. Your appraisal cost should be $300 to $400.
Second, please understand lenders can set their own outrageous rules for canceling PMI premiums (which are often $100 or more per month). If your mortgage is owned by “good guy” lenders Fannie Mae or Freddie Mac, they require at least 20 percent homeowner equity and an on-time payment record before canceling PMI.
Third, if you don’t have your lender’s required 25 percent equity to cancel your unnecessary PMI premiums, then you can decide if you want to make a pest of yourself to cancel your PMI monthly fees.
If you have solid evidence of at least 20 percent home equity, based on the professional appraisal, you might want to sue your lender each month in local Small Claims Court for refund of your monthly PMI premium. However, be sure to always pay your full monthly mortgage payment, including that wasteful PMI fee.
After a few months of default judgments, most lenders give up and cancel the unnecessary PMI. But it’s a pain to file the breach of contract and/or fraud lawsuit each month, pay the Small Claims Court fees, and have the lender served with the summons and complaint (usually by certified mail; the Small Claims Court clerk can help with this).
I’ve never personally used this method, but many readers report success by suing their lender each month for refund of their monthly PMI premiums.
IS E-BAY NEIGHBOR DEALER A NUISANCE?
DEAR BOB: I have owned and lived in my townhouse since 1981. But my neighbor is extremely loud and operates his business over E-Bay with much vehicular and foot traffic. I have had his customers knock on my door instead of his by mistake. Although we homeowners are not allowed by our CC&Rs (conditions, covenants, and restrictions) to have an active business with traffic, the property manager refuses to act. If I decide to sell my townhouse, must I disclose this neighbor as a “pre-existing condition?” – Sandra B.
DEAR SANDRA: Have you politely talked with your neighbor about the noise? Maybe he isn’t aware of the disturbances.
That happened to me a few months ago. My wonderful neighbor is a hard-working, extremely successful CPA who leaves home at 5:45 a.m.
Depending on his mood, he drives his noisy Ferrari or quieter Porsche. They’re beautiful cars. But at that early hour, I really don’t enjoy them waking me up.
One morning, when the noise seemed especially loud, I politely phoned him to ask if he could be quieter when he left for work each morning. He said he didn’t realize the noise was so loud. Since then, I’ve slept blissfully as he drives quietly away.
In most communities, it is now legal to operate a home business, with some restrictions. Many cities even welcome home businesses as long as a business license is obtained (to generate tax revenue).
As for your disclosure of the neighbor’s home business, if it is legal it probably need not be disclosed to prospective buyers of your townhouse unless it is a neighborhood nuisance. If the disturbance has risen to the level of a nuisance, you and other neighbors should consider bringing a private nuisance abatement lawsuit against the neighbor. For details, please consult a local real estate attorney.
The new Robert Bruss special report, “Pros and Cons of Flipping Houses and Investment Properties for Fast Cash Flow Profits,” 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. Questions for this column are welcome at either address.
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