DEAR BOB: Although we are not in the market to buy or sell a home, we look forward to your articles because you often discuss home ownership. As we are ages 56 and 58, we are anticipating retirement in a few years. My question is about the best way to hold title to our home. We hold title as joint tenants with right of survivorship. But you recently got us worried about what if we both die at the same time, such as in a plane crash. Neither of us has a written will. We have two adult children who are our heirs. As we take four or five air trips together each year, what would happen to our house and two rental houses if we die at the same time? – Vivian R.
DEAR VIVIAN: As you probably know, when a joint-tenant real estate owner dies, the surviving joint tenant automatically receives title without probate. In most states, all that is required is for the surviving joint tenant to record a certified copy of the death certificate and an affidavit of survivorship with the county recorder.
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However, when all joint tenant co-owners die at the same time, such as in a plane crash, their joint tenancy property shares are probated according to the terms of their individual written wills. In most states, that means their assets must go through probate court costs and delays (some states have exceptions for small estates and primary residences).
Everybody needs a written will. Be sure to tell friends and relatives where to find your wills. Please don’t put your wills in your bank safe deposit box, which might be inaccessible to heirs after your death.
In addition to simultaneous death, there are other joint-tenancy pitfalls. For example, suppose you or your husband contracts Alzheimer’s disease or has a severe stroke. The other spouse might need to sell the joint-tenancy house. The signatures of both spouses are usually required. A power of attorney form might not be sufficient.
A far better alternative is a joint living trust, or two living trusts, depending on what your attorney advises. If a living trust co-owner becomes incapacitated, the other can take over the living trust assets to sell, refinance, rent, or do whatever is necessary.
If both living trust co-owners die at the same time, the named successor trustee distributes the living trust assets according to the provisions of the living trust without the need for probate. 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 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
FIVE-YEAR HOLDING PERIOD REQUIRED FOR SOME EXCHANGES
DEAR BOB: I’m sure you already know this, but effective Oct. 22, 2004, President Bush signed into law an important change to Internal Revenue Code 1031 for tax-deferred exchanges. As I understand it, when an investor trades into a rental residence that eventually becomes the investor’s home, Internal Revenue Code 121(d) now requires at least five years of ownership, with at least two years of principal residence occupancy, before becoming eligible for the $250,000 (or $500,000 for a married couple) home sale tax exemption. Is this the way you understand the new change? – George C.
DEAR GEORGE: Yes. Many realty investors have big capital gains in their investment or business properties. If they sell, they will owe 15 percent federal capital gain tax, plus any state tax.
However this tax can be avoided by a tax-deferred exchange trade up for another investment or business property of equal or greater cost and equity.
Many investors trade for a rental house that will eventually become their principal residence, which is eligible for the IRC 121 tax exemption up to $250,000 (or $500,000 for a qualified married couple).
The new change to IRC 121 requires at least five years of ownership before sale such a principal residence acquired in a tax-deferred exchange. Of course, the property must be a rental at the time of acquisition (to show rental intent).
However, if it is sold in less than five years, the deferred capital gain from the exchange becomes fully taxable. More details are available from your tax adviser.
MARRIAGE INCREASES PRINCIPAL RESIDENCE TAX EXEMPTION
DEAR BOB: I purchased my condo residence in 2002 when I was single. Recently, I got engaged. The condo has appreciated about $200,000 in market value. After we get married, will our tax-exempt amount remain at $250,000 or will we then qualify for the $500,000 exemption? – Daniel M.
DEAR DANIEL: Congratulations on your very profitable condo purchase. If you sell it now, thanks to your $250,000 principal residence tax exemption from Internal Revenue Code 121 makes your sale profit tax-free after 24 months of ownership.
But I presume you and your bride plan to live in your condo, hoping it will continue to enjoy a further spectacular market value increase.
After your wife has occupied the condo with you at least 24 months, if you decide to sell, then up to $500,000 of the principal residence sale profits will be tax-free. Only one spouse’s name need be on the title if a joint tax return is filed in the year of the principal residence sale. Full details are available from your tax adviser.
WHAT IS A MORTGAGE JUNK FEE?
DEAR BOB: Our home purchase is closing soon. Here is our list of mortgage fees we are expected to pay: standard processing fee, application fee, credit review fee, funding fee, document preparation fee, settlement fee, recording fee, and courier fee. Are any of these negotiable “junk fees,” which you often discuss? – Larry B.
DEAR LARRY: Legitimate mortgage fees are those paid to a third-party service provider, such as an appraisal fee. The recording fee and courier fee you listed are such third-party fees.
But the standard processing fee, application fee, credit review fee, funding fee, document preparation fee, and settlement fee appear to be 100 percent pure-profit mortgage lender junk fees.
Unless they were disclosed on your “good faith estimate” statement at the time of loan application, and you agreed to pay them, you should be able to negotiate them away.
Most mortgage lenders charge a 1 percent loan fee, which should include their loan processing costs and profit. Some lenders also receive legal kickbacks from the actual lender, often called a “yield spread premium.” Any extra junk fees you pay are pure lender profit.
HOW MUCH SHOULD CONDO ASSOCIATION HOLD IN RESERVES?
DEAR BOB: I own a condo in a complex of 220 units. Approximately 49 percent are rentals. Our monthly association fees are $185. But the association has little in reserves. What are the average monthly condo association fees and what is recommended for an association to keep in reserves? Should the CC&Rs (conditions, covenants and restrictions) state a maximum occupancy for each unit to avoid the complex deteriorating more? – Kearney K.
DEAR KEARNEY: With 49 percent rentals, that is very bad. Most mortgage lenders will refuse to make new loans in your complex. The few that will do so will share higher-than-market interest rates.
The result is more difficulty selling condos in that complex. But most condo CC&Rs say nothing about maximum occupancy.
Your monthly fees of $185 are very low. Of course, condo association fees vary according to what is included. Maintenance of common areas is always included. But there might be included utilities, usually at least water.
For example, I own a two-bedroom second home condo in Minnesota where my monthly condo fee is $298 including heat. Winter heat is a “big deal” in Minnesota.
Our dues have been raised 5 percent each year for the last few years to increase our reserves because our building is about 25 years old. We only have three renters out of 63 units.
As a very general rule, condo replacement reserves should be at least $1,000 per unit. $2,000 or $3,000 per unit is much better, depending on the building age.
WHY NO TAX ON SALE OF HOME INHERITED FROM PARENTS?
DEAR BOB: Recently you answered a question from two sisters who inherited their parents’ home, which had been purchased many years ago at a very low price. You said they would not owe any capital gains tax if they decide to sell. Why? – Carolyn H.
DEAR CAROLYN: When an heir receives title to inherited and appreciated real estate (or other assets, such as common stocks), the heir receives title with a new stepped-up basis of market value on the date of the decedent’s death (or alternate date used by the estate).
If the decedent died in 2004 and left a net estate less than $1.5 million, no federal estate tax is due. The heirs received the inherited property at today’s market value. Little or no capital gains tax is due if they sell it shortly after inheritance. For full details, please consult your tax adviser.
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.
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