DEAR BOB: Your recent column containing a question from a home buyer who was worried about losing his $4,000 deposit because the house miserably failed the home inspection made me wonder why the buyer’s agent didn’t make the offer contingent on a satisfactory home inspection. Had he done so, there would be no problem and the buyer would have received his $4,000 refund with no hassle. Having been a Realtor since 1955 and still going strong at 80 with Century 21, after overcoming two heart attacks and colon cancer, your column is the main reason I subscribe to the newspaper to keep up to date. You give excellent advice and sometimes even jog my memory about a detail I might have forgotten – Thomas P.
DEAR THOMAS: Thank you for your great letter. Congratulations on still selling homes at age 80 after 50 years in the business. I think you found a career you really enjoy.
Purchase Bob Bruss reports online.
You are 100 percent correct that a buyer’s agent should recommend the purchase offer contain a contingency clause for a satisfactory professional home inspection. I also suggest making the offer contingent on a satisfactory appraisal to obtain the mortgage the buyer needs.
But loading up a buyer’s purchase offer with more than these two vital contingency clauses often causes sellers to refuse to accept, especially if there are other competitive purchase offers. Best wishes for great future realty sales success.
ONLY ONE WAY FOR INVESTOR TO SELL WITHOUT OWING TAX
DEAR BOB: I bought a rental house last summer by using an Internal Revenue Code 1031 tax-deferred exchange. When my tenant’s lease expires after a year, can I sell the house and avoid paying tax on my deferred profit? Do I have to do another IRC 1031 exchange or can I pocket the money? – Steve M.
DEAR STEVE: If you sell that rental house when the tenant vacates, you will owe capital gains tax on your deferred profit. Unless you want to make another tax-deferred trade, the only way to avoid tax on its sale is, after the tenant moves out, for you to move in to make the house your principal residence at least 24 of the 60 months before its sale.
Internal Revenue Code 121 then allows you to claim up to $250,000 tax-free capital gain (up to $500,000 if you and your spouse both meet the occupancy test) upon the sale.
In a recent tax law change effective Oct. 22, 2004, because the rental house was acquired in a tax-deferred exchange, it must be held at least five years (although you need occupy it only 24 of those 60 months) before you can qualify for the IRC 121 tax break.
For full details, please consult your tax adviser. More information is in my special report, “Everything Homeowners Need to Know About the New $250,000 and $500,000 Home Sale Tax Exemption Rules,” 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.
SENIOR CITIZEN REVERSE MORTGAGES CAN BE REFINANCED
DEAR BOB: Suppose I, at age 68, get a maximum jumbo reverse mortgage on my $750,000 house, and suppose the house keeps appreciating in market value in the next five years. Can I get a second reverse mortgage or increase the amount of my first reverse mortgage? – Janette H.
DEAR JANETTE: Your question reminds me of my law school criminal law class. The late Professor Rollin Perkins began every class with the word “Suppose…” Then he gave us a hypothetical criminal law situation to solve.
Fortunately, your question is much easier to answer than his hypotheticals. Yes, a reverse mortgage can be periodically refinanced as your home increases in market value. But I am not aware any of the three major lenders, FHA, Fannie Mae or Financial Freedom Plan, allow increasing the maximum limit of an existing reverse mortgage.
Because a reverse mortgage must be recorded as a first-lien mortgage against your home, a second-lien reverse mortgage is not allowed. However, please be aware when you refinance an existing reverse mortgage with a new one you will again incur substantial up-front loan costs.
NO NEED TO CHANGE TITLE INSURANCE FOR A LIVING TRUST
DEAR BOB: My wife and I just put the title to our home into our living trust. Does our title insurance policy have to be changed or does the title insurer have to be notified about the living trust? – Bill O.
DEAR BILL: Your owner’s title insurance policy protects you as long as you and your heirs own your home. Placing the title into your living trust for probate avoidance purposes does not affect your owner’s title policy.
Even the IRS recognizes living trusts are just a title-holding method. Title transfer into your living trust has no effect on your title insurance or your tax benefits, such as the $250,000 and $500,000 principal residence sale exemptions of Internal Revenue Code 121, when you sell your home. For full details, please consult your tax adviser.
PARTITION LAWSUIT RESOLVED FAMILY PROBLEM
DEAR BOB: Thank you for your item a few months ago about a partition lawsuit for property co-owners who disagree. About three years ago, my brother and I inherited our mother’s house. While a friend rented the house, all went well. But last year, the friend moved out and the rent stopped. But the mortgage payments continued. I told my brother I wanted to sell the house, as I needed cash. However, he didn’t want to sell. Yet he refused to pay his half of the mortgage payments while the house was vacant. So I had my attorney file a partition lawsuit. The case didn’t even go to trial. My brother quickly agreed to sell. We both walked away from the sale with more cash than we have ever had in our lives, mostly tax-free thanks to the “stepped-up basis” on our inherited house. Filing that partition lawsuit, which I learned about in your column, was the best thing I ever did (except marrying my loving perfect husband) – Cindy T.
DEAR CINDY: I’m always glad to help. When property co-owners disagree, a partition lawsuit can force a sale of the property with the sales proceeds divided among the owners.
HOW CAN CONDO ASSOCIATION STOP TOO MANY RENTALS?
DEAR BOB: I am president of a 26-unit condo association. Until about six months ago, we had a well-run association managed by a superb professional management company. But then we had three condos come up for sale. They were all purchased by outside absentee investors who rented them to disruptive tenants who don’t fit in with the owner-occupants. We have tried asking the tenants to behave. But they are young and rowdy. They have been abusive to some of our older owners. What can we do to stop rentals in our condo complex? – Herb W.
DEAR HERB: You have a problem shared with many condo associations. When the percent of condo rentals climbs higher than 20 percent to 30 percent, most mortgage lenders either stop making loans or they charge above-market interest rates.
Your condo association should consult a local condominium law attorney for the most effective ways to limit or prohibit rentals. A change in the CC&Rs (covenants, conditions and restrictions) or the by-laws will probably be necessary. But you are wise to tackle the problem now before your rental percentage grows and affects the market value of your condominiums.
IS A HOME EQUITY LOAN REALLY A FIRST MORTGAGE?
DEAR BOB: For some time I have been wondering why a home equity loan on a fully paid home is not considered a first mortgage. I asked a real estate agent friend and he doesn’t know either. Considering that the equity loan on a fully paid home has the first-lien position, and no other claim can come in front of it in event of default, isn’t it like a first mortgage? – Marcial C.
DEAR MARCIAL: Yes. A home equity loan is just a more acceptable name for a second mortgage. However, if there is no existing first mortgage, then the home equity loan is a first mortgage.
I have such a situation on my second-home condo. A few years ago I obtained a $100,000 home equity loan, using $15,000 of the credit line to pay off my existing 9 percent interest rate first mortgage. The result is my home equity credit line is really a first mortgage. As a result, my lender loves me.
The new Robert Bruss special report, “How the New Tax-Deferred Real Estate Exchange Rules Can Make You Very Wealthy,” 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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