DEAR BOB: About 10 years ago, my wife and I bought a beach house thinking we would use it for vacations and weekends. But our children had other plans for us, as they didn’t like the cottage because it is rather “cozy” (i.e. small). So we rarely used it. For the last eight years, we rented it to a widow who recently died. When we looked into selling it, several local Realtors informed us it is now worth about $600,000 more than we paid. Our CPA says this will be a taxable capital gain if we sell. She says the only way to avoid tax on selling this rental beach house is to make a tax-deferred exchange for another investment property. But we don’t want another property. As we are retired, can we move into this beach house for a few years and then claim that $500,000 home-sale tax exemption you often discuss? – Edward G.

DEAR EDWARD: Yes, you can convert that rental beach house into your principal residence.

However, the beach house will have to be your principal residence for an “aggregate” two of the five years before its sale. Then it will qualify for up to $500,000 (up to $250,000 per owner) principal residence sale tax-free profits allowed by Internal Revenue Code 121. For a married couple, only one spouse’s name need be on the title if you file a joint tax return in the year of home sale.

Of course, your capital gain exceeding the $500,000 exemption will be taxable, currently at the maximum 15 percent federal capital gain tax rate. In addition, any depreciation deducted since May 6, 1997, will be “recaptured” (that means taxed) at the special federal “recapture” tax rate of 25 percent.

Just in case the IRS audits you for the tax year of the beach house sale, indications of your principal residence include voting location, place of filing your income tax returns, driver’s license address, car registration address, utility bills, bank account location, and employment location. For more details, please consult your tax adviser.

WHERE TO FIND REAL ESTATE FORMS

DEAR BOB: I recently read your excellent special report on lease-options. You recommend Professional Publishing Co. as a good source of lease-option and other real estate forms. But when I tried to contact them, I discovered they have gone out of business. What source do you recommend for real estate forms? – Vicky R.

DEAR VICKY: Many readers recently asked similar questions about this long-time real estate forms supplier. I was shocked when Professional Publishing Co. of Novato, Calif., quit printing its excellent real estate forms, which were available as long as I can remember.

But the company owner, Jim McKenney, Esq., informs me all the superb forms are now available on the Internet at www.TrueForms.com. He says the Web site offers both desktop and online versions, as well as form sets and single transaction packets.

“We regret that some of our customers do not have computer access. However, since almost all of the users preferred the software versions, we had no choice but to discontinue printing the hard copy,” McKenney reports.

DURABLE POWER OF ATTORNEY MEANS NOTHING AFTER DEATH

DEAR BOB: I hold a durable power of attorney for my father who died several months ago at age 93. When I went to the recorder’s office to transfer title to his home according to the terms of his will, the clerk said my power of attorney was worthless after my father’s death. An attorney tells me his estate must now go through Probate Court, which will take many months since he was worth over $3 million and he owned real estate in three states. Is this true? – Todd P.

DEAR TODD: Yes. A durable power of attorney is valid while the grantor is still alive, but perhaps incompetent and unable to make decisions. For example, it is often used when a person has Alzheimer’s disease or has suffered a severe stroke.

The probate attorney is correct. To make matters worse, probate proceedings will probably be necessary in all three states where your father owned property, requiring the hiring of probate attorneys in each state.

Your late father would have done you a big favor with a revocable living trust which both (1) avoids probate after death regardless where the living trust assets are located, and (2) in the event of incompetence, provides for asset management by the successor trustee. More details are in my special report “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 91010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.

HOW TO RESOLVE PROPERTY DISPUTE BETWEEN CO-OWNERS

DEAR BOB: When my aunt died, she left her house to my brother and me. He took out a home equity loan against the house, which I signed, because he promised to repair the house with a new roof and siding. But my brother has since purchased a new car and made no repairs to the home. All the money is now gone. The bank is threatening to foreclose. My brother refuses to pay the home equity loan. But I want to save the house and am willing to pay the payments if there is a way to legally have my brother’s name removed from the title. Is there a way I can pay the home equity loan and become the sole owner? – Tania R.

DEAR TANIA: Because you and your brother are now both on the title to the house, you can bring a partition lawsuit to force the sale of the property. Partition lawsuits between disagreeing co-owners are quite common.

However, it will be up to the judge to allow you to buy out your brother’s equity in the house rather than having the house go to a partition sale. Please consult a local real estate attorney where the house is located. Time is of the essence so the house is not lost by foreclosure.

HOW TO CHANGE TITLE AMONG CO-OWNERS

DEAR BOB: My parents and I purchased a house together as equal partners. The mortgage has all three names on it. In about five years, the mortgage will be paid in full. My parents and I are thinking of changing the deed into my name alone. Can this be done before the mortgage is paid off and how do we do it? – Nancy K.

DEAR NANCY: Yes, the title transfer can be done very easily. Your parents can sign and record a quit claim deed to you. The result will be you are the sole owner.

However, depending on the equity transferred, if it is over $11,000 per donor, they must file a federal gift tax return. But no gift tax will be due if their lifetime gifts over $11,000 per donee per year (which do not require a gift tax return) do not total over $1 million.

They should consult their tax adviser about their equity gift to you regarding any gift tax liability.

HOW TO BEAT COMPETITIVE HOME BUYER’S PURCHASE OFFER

DEAR BOB: My mom said she read in your article that when we make a home purchase offer we can add: “This purchase offer valid for $3,000 above any other competitive purchase offer” (or something to that effect). How should we word it? The Realtor we are working with says that is illegal – Stacy H.

DEAR STACY: In a very competitive local “seller’s market” for homes (where there are more qualified buyers than homes for sale), you can make your purchase offer the winner.

However, the seller won’t have to accept your offer, especially if a lower price bidder appears better qualified. For this reason, be sure you are pre-approved (not just pre-qualified, which means nothing) in writing by an actual mortgage lender.

I suggest a phrase such as “In the event a higher, legitimate purchase offer is received for this property from another qualified buyer within 24 hours, I offer $5,000 more.”

If you don’t think that amount is enough to impress the seller into accepting your written offer, change the amount to $10,000 or whatever you think is necessary. There is nothing illegal about including such a clause in your written purchase offer. For details, please consult a local real estate attorney.

APPRAISER AGREES APPRAISAL IS AN ART

DEAR BOB: As a licensed appraiser with 38 years of experience, I especially enjoyed your recent too brief article about appraisals. I’m glad I have an established practice, with four associate appraisers in my office, where we have more lender referrals than we can handle. But I am amazed at the gross incompetents in our business. You are so right that borrowers (and lenders) should question appraisals with which they do not agree. Also, as you know from reading the excellent www.appraisaltoday.com newsletter, we have more than our share of crooks who enable fraud on lenders. I just wish there was something we honest appraisers could do. Any ideas? – Ralph R.

DEAR RALPH: Thank you for your support. Once a year, after I’ve paid my life insurance premium, I write my annual “How to Get a Good Appraisal” article. But this year, the few e-mails and letters I received on this issue supported me for explaining how borrowers can challenge appraisals with which they do not agree.

Being an appraiser is a very difficult job. Borrowers want appraisers to “hit the mark” by appraising the property high enough for the borrower to get the loan desired.

But lenders sometimes play dirty tricks, such as instructing the appraiser to determine a “quick sale market value,” meaning a below-market value. Sorry, I don’t have any brilliant ideas how to clean up the appraisal profession.

The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Seller 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
).

***

What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

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