DEAR BOB: My wife and I are in a second marriage for each of us. We live in her house, which is in her name only. If we sell the house, would we be entitled to the $500,000 principal residence sale tax exemption or just $250,000? Frank F.
DEAR FRANK: I have very good news for you and your wife. Internal Revenue Code 121 specifies that a husband and wife filing a joint income tax return in the year of their principal residence sale are entitled to a tax exemption up to $500,000 even if title is held in one spouse’s name only.
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However, both spouses must meet the occupancy test, which requires an “aggregate” two out of the last five years principal residence occupancy. If you both meet this occupancy time test and file a joint tax return in the year of the sale, it appears you qualify for up to $500,000 tax-free principal residence sale capital gains. For more details, please consult your tax adviser.
HOW TO BUY FOR NOTHING DOWN “SUBJECT TO” CURRENT MORTGAGE
DEAR BOB: In a recent article, you said you have bought and sold many properties for nothing down. I am disabled and live on a fixed income. My credit is good but conventional lenders won’t help me. What kind of a lender did you use? – Steven W.
DEAR STEVEN: The definition of “nothing down” means no cash out of the property buyer’s pocket. But it doesn’t mean the seller won’t receive any cash. In fact, I’ve bought rental houses for nothing down where the sellers received 100 percent cash. But it wasn’t cash out of my pocket.
One way to buy for nothing down is to purchase the property with its existing mortgage. Many existing home loans can be taken over by the buyer for a small assumption fee paid to the current lender, typically less than a 1 percent fee. The balance of the sales price can be paid either by funds borrowed on your credit line or by the seller carrying back a second mortgage.
Another way to buy for nothing down is to obtain a new first mortgage for 75 percent of the sales price, and use your unsecured bank credit line for your cash down payment. The result is a nothing down purchase for you. More methods are in my special report, “Secrets of Buying Your Home or Investment Property for Nothing Down,” 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.
CAN A QUIT CLAIM DEED BE EFFECTIVE UPON OWNER’S DEATH?
DEAR BOB: I own a house and a vacant lot, which I do not hold title in joint tenancy with right of survivorship with my heir. My lawyer said a quit claim deed is the way to go. He said it wouldn’t be recorded until after my death at which time my heir would receive the quit claim deed. But then I read in your column that a quit claim deed is effective only if delivered to the grantee before the owner’s death? Who is right? – Hayden L.
DEAR HAYDEN: To be legally effective, a deed must be delivered unconditionally to the grantee before the property owner’s death. If a deed is delivered conditionally, to be effective upon your death, the conveyance isn’t yet complete and can be rescinded by the grantor.
You could prepare and deliver a quit claim deed for your lawyer to hold in irrevocable trust until after your death. But that is not yet completed delivery to the grantee. If a title dispute arises, or you get a judgment lien against you, you still own the property and it is subject to legal attack by your creditors when you die.
A better solution is to deed your property titles into your revocable living trust. That living trust avoids probate delays and specifies who is to receive your assets upon your death. Because it is revocable, you can change it whenever you want.
DEATH IS THE ULTIMATE TAX SHELTER
DEAR BOB: Years ago, my husband and I bought our home for about $160,000. It is in a wonderful neighborhood and has now appreciated to over $1 million in market value. We both want to live in our home until we die. But we don’t want to burden our heirs with the huge tax we would encounter, even with the $500,000 principal residence exemption you often discuss, if we sell now. How can we avoid burdening our heirs with a big tax? – Yvonne C.
DEAR YVONNE: Don’t worry. Death is the ultimate tax shelter of all. Your heirs will receive your home with a new stepped-up market value on the date of the last co-owner’s death.
Meanwhile, when you or your husband dies, the surviving spouse will receive a new stepped-up basis with no tax due. The reason is property transferred upon death by one spouse to a surviving spouse is completely free of federal estate tax, regardless of the estate value.
However, when the second spouse dies, there might be federal estate tax payable by that spouse’s estate.
The current federal estate tax exemption is $1.5 million for deaths in 2004 and 2005. The exemption increases to $2 million for deaths in 2006, 2007, and 2008. Decedents dying in 2009 will have a $3.5 million exemption. In 2010, the federal estate tax is fully repealed for deaths that year. But unless Congress acts, in 2011 the old $1 million federal estate tax exemption is reinstated. Ask your tax adviser for more details.
NO PROPERTY TITLE FOR VOLUNTEER PROPERTY TAX PAYER
DEAR BOB: I belong to a Sportsman’s Club of 37 members. Some of the members can’t pay their dues. If I volunteer to pay the club’s annual property tax of $1,925.58 per year, can I take title to the land after several years of making the payments? – Robert B.
DEAR ROBERT: No. If that were the law, everyone would be volunteering to pay the property taxes on properties belonging to other people, hoping to eventually gain title.
Each state has different laws as to when property goes to tax sales for unpaid realty taxes. Some states sell tax lien certificates to investors so the city or county gets their tax money immediately. If the property owner doesn’t redeem within a specified number of years, the tax lien certificate owner gets the title.
In other states, such as California, the property taxes can go unpaid up to five years before the property is sold by the tax collector for unpaid taxes. Obviously, California cities and counties don’t want their property tax revenue quickly or they would switch to tax lien certificates, which are far better for investors and government agencies.
WHEN IT IS LEGAL FOR LANDLORDS TO DISCRIMINATE
DEAR BOB: I am told that, by law, a landlord cannot refuse to rent to anyone if they have the money to pay the rent. This leaves landlords wide open to tenants who pay the first month’s rent but won’t pay the next month’s rent. In some states, it takes months to evict a non-paying tenant. Also, some tenants damage the premises and then demand their landlord make repairs. What can a landlord do about such bad tenants? – Elmer P.
DEAR ELMER: You are mistaken. Landlords do not have to rent to every applicant who has the first month’s rent and a security deposit.
Although landlords cannot refuse to rent based on race, nationality, religion, color, handicap, family status, age, and other specific reasons, landlords can and should discriminate based on the applicant’s income, credit report, FICO score, and rental history.
However, landlords must treat all applicants equally. It is illegal discrimination, for example, to run credit reports only on applicants from Greenland but not others. After checking an applicant’s income and credit history, I recommend phoning their two previous landlords to ask, “Would you rent to this tenant again?” Checking out rental applicants before they move in is the best way to prevent trouble.
The new Robert Bruss special report, “Robert’s Real Estate Rules: How to Avoid the 10 Worst Home Buyer Mistakes,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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