DEAR BOB: We have a wonderful problem and hope you can help. About 14 years ago, we bought a second or vacation home in a winter ski and summer vacation area. Our family has enjoyed many happy times there. But we are using it less and less each year. In 2004, we only used it a few weeks in the summer, plus a few winter weekends with our grown children and the grandkids (at our ages we no longer risk skiing). After talking it over, we decided selling would be prudent because the net profit will be about $375,000. However, since this is not our principal residence, our profit will be taxable as a capital gain. Is there any way to avoid tax? – Ralph R.

DEAR RALPH: Yes. Your situation clearly is not eligible for the Internal Revenue Code 121 principal residence sale exemption up to $500,000 for a qualified married couple (up to $250,000 for a single homeowner). To qualify, you must have owned and occupied your principal residence at least 24 of the 60 months before sale. Unless you want to move in and make this property your primary residence for 24 months, it clearly won’t qualify for the IRC 121 exemption.

Purchase Bob Bruss reports online.

Your only tax avoidance alternative is to make a tax-deferred exchange by using Internal Revenue Code 1031. To qualify, the property must be a rental at the time of its sale and you must acquire a replacement rental or investment property of equal or greater cost.

To accomplish this, you could lease-option the vacation-second home for at least six months after which time the tenant can exercise the option to purchase. Then, you can use the sales proceeds to either acquire a rental or investment property, or you might like to acquire a qualified share in a commercial tenancy in common (TIC) property, which will pay you monthly income.

That’s what my friends Dory and Andy did a few years ago. They sold their rental house and made an IRC 1031(a)(3) tax-deferred Starker exchange for a TIC share in a building leased to Applebee’s Restaurants. Ever since then, they have enjoyed their share of the rental income with no management worry. For full details, please consult your tax adviser.

COSTLY PITFALL OF MAKING A PROPERTY GIFT

DEAR BOB: About 15 years ago, our parents deeded their mobile home and lot to my brother and myself with a retained life estate for them. We have now found it necessary to sell the property and turn the net proceeds over to our parents. What are the tax consequences? – Stan O.

DEAR STAN: Because the property was a gift to you and your brother, you took over your parents’ adjusted cost basis at the time of the gift. Your taxable capital gain will be the difference between that amount and the net sales price you receive.

This is a classic example of why it usually is not smart to give property away, retaining a life estate. Now you and your brother, not your parents, will owe the capital gains tax upon sale.

If they had retained title, they would qualify for the Internal Revenue Code 121 principal residence sale exemption up to $500,000 (up to $250,000 for a single homeowner) if they owned and occupied their principal residence an aggregate 24 of the 60 months before the sale. For full details, please consult your tax adviser.

ONLY WAY TO GET OUT OF MORTGAGE DEBT IS TO REFINANCE

DEAR BOB: Just over a year ago, I purchased a condo with my daughter. It is actually for she and her partner. But I was needed on the title and the loan to get the mortgage approved. Our intent is to move this condo into my daughter’s and partner’s name as soon as possible. What is the easiest way to do this? The partner is not on the title and feels at risk even though she put up a good portion of the down payment – Joe K.

DEAR JOE: To get your name off the title, you can sign and record a quit claim deed to your daughter (and partner, if desired).

However, your name will always be on that mortgage obligation because the lender is unlikely to release you. The only way to get off that mortgage debt is for your daughter to refinance the existing mortgage with the same or another mortgage lender in her name alone (or with the partner).

HOW TO BECOME A REAL ESTATE INVESTOR

DEAR BOB: In a recent response, you suggested the reader consider becoming a real estate investor rather than a realty salesperson unless he wants to sell property for commissions. “No license is required and your potential profits are much greater,” you said. What is the best way to become a realty investor? Read books? Buy one of those TV seminar programs? – Rita K.

DEAR RITA: I suggest you become a real estate investor by taking low-cost realty courses at a nearby community college. Start with Real Estate Principles. Then advance to courses that interest you, such as Real Estate Law (my personal favorite), investments, property management, appraisal and finance.

In addition, read recent real estate investment books. If you missed my recent “Ten Best Real Estate Books of 2004” list, you can find it at www.bobbruss.com, plus lots of other recent real estate book reviews there.

REALTOR SAYS WELLS FARGO MORTGAGE ISN’T BAD

DEAR BOB: As a Realtor, I especially enjoy your articles each week. But you recently said you had a bad experience with Wells Fargo Mortgage and do not recommend that lender. Personally, I refer lots of business to Wells Fargo and find that lender to be excellent for my clients. It seems unfair of you to make such a blanket statement, which affects all their hard-working mortgage people – Margaret P.

DEAR MARGARET: In the recent item to which you refer, I gave a personal example with my Wells Fargo home equity loan. Then I added, “But I do not recommend this lender.”

Perhaps you read too much into that statement made after my two bad experiences with Wells Fargo. I’m sure they have many fine loan agents. But I have yet to do business with one of them.

PROVING SELLER KNEW OF HOME DEFECT ISN’T EASY

DEAR BOB: We bought our home less than a year ago. The seller gave us a defect disclosure statement, which showed no significant problems. Shortly after moving in, we noticed a water stain on the downstairs bathroom ceiling which is directly below the upstairs bathroom. The house had been completely repainted shortly before our purchase so there was no ceiling stain at that time. When water started dripping, we decided to investigate. Our plumber discovered the upstairs bathroom had a leaking shower drain due to poor plumbing and tile work. To correct the leak, the upstairs shower pan had to be replaced. The tile man said it looked like a “do it yourself” job of recent very poor workmanship. We spent about $1,250 to fix the problem. Do we have any recourse against the seller? – Victoria Y.

DEAR VICTORIA: Unless you can prove the seller knew about and failed to disclose the known defect in the home you purchased, the seller has no liability to you. Maybe the seller didn’t use that shower so there was no drain leak into the downstairs bathroom while he owned the home. Or maybe the seller’s fresh paint concealed the leak evidence.

Thankfully, the repair cost wasn’t huge. Your first step is to write a polite demand letter to the seller, explaining the facts you discovered, asking for $1,250 reimbursement. If you don’t receive payment, your second step is to decide if you want to sue the seller in local Small Claims Court.

REVERSE MORTGAGE LOAN LIMITS INCREASED FOR 2005

DEAR BOB: It has become painfully obvious my elderly mother needs more income to stay in her house. Neither my brother nor I are in a financial position to help her. She said she looked into a reverse mortgage, after hearing a speaker at the local senior citizens center. But her home is worth around $500,000, and she could only get about $160,000, so she wasn’t interested. Her house will soon need a new roof and mom needs a better car. Any suggestions? – Kevin R.

DEAR KEVIN: It sounds like your mother consulted a reverse mortgage loan agent who only arranges FHA reverse mortgages. FHA recently increased their loan-limit range for 2005 to $172,000 up to $312,000, depending on home location.

However, Fannie Mae now offers reverse mortgages up to about $360,000 and Financial Freedom Plan has no limit on its reverse mortgages for upscale homes like your mother’s.

I suggest you and she consult a loan originator offering all three types of reverse mortgages. You can find such reputable lenders at www.reversemortgage.org. More details are in my special report, “Secrets of Tax-Free Reverse Mortgage Income for Senior Citizen Homeowners,” 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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