DEAR BOB: Thank you so much for your great advice not to pay all cash for a home. I almost made that mistake. After my husband died in 2004, I sold our home and received about $600,000 tax-free cash. I decided to move near my two daughters and my wonderful grandchildren. I found what I thought was a perfect brand-new condominium I could have paid cash for. But I remembered your advice. I had no trouble qualifying for the developer’s 10 percent down-payment plan.
Shortly after moving in early in 2005, I discovered many problems and misrepresentations. My son-in-law, who is a lawyer, tried to help. But it is now clear the developer is a “crook” who took advantage of us buyers. The condo complex is a disaster with lots of problems, such as bad construction and uncompleted amenities. Only about 70 percent of the units are sold. My number one complaint is the poor soundproofing between units. Many owners have stopped paying their monthly fees. The developer is either broke or on the edge of bankruptcy. Because the mortgage lender was in on the developer’s dirty tricks, my lawyer son-in-law suggests I “walk away” and buy in an established nearby condo complex that we know is superb. Do you agree? –Lucy T.
DEAR LUCY: I am sorry to learn about your bad condo experience. But I am glad you didn’t tie up a large amount of cash in what now appears to be an unsaleable condo.
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Of course, I can’t advise you when it is time to “bail out” of your bad condo. I would never advise ruining your credit by stopping payments on your mortgage unless you have no other alternative.
I suggest you, or your lawyer son-in-law, contact the mortgage lender to see if it will accept a “deed in lieu of foreclosure” to your bad condo. If the lender agrees, be sure you have a written agreement in advance that the lender won’t report anything negative on your credit reports.
Your situation is a classic example of why I always suggest house and condo buyers obtain a 70 percent to 80 percent mortgage at the time of purchase. If everything turns out well, and there is no mortgage prepayment penalty, after a few years the mortgage can be paid off. But I hate to see buyers pay all-cash for a house or condo, especially new construction, which turns out badly.
HOW LONG MUST EXCHANGED PROPERTY BE A RENTAL?
DEAR BOB: In July 2005, I traded my rental condo for a house where I ultimately want to retire. But I know the Internal Revenue Code 1031 tax-deferred exchange rules require me to rent the house to tenants, which I have done. My question is, how long must the house be rented before I can evict my tenants and move in? –Alan E.
DEAR ALAN: Nobody knows for sure. Your question is frequently asked. I have asked your question of IRS officials in Washington, D.C., and they refuse to answer. The reason is there are no regulations or tax court decisions on this issue.
If the IRS should audit your tax return, all you must prove is rental intent at the time of your tax-deferred trade. Most CPAs and tax advisers suggest renting the acquired property at least six to 12 months before converting it into your personal residence. For more details, please consult your tax adviser.
NO TAX DEDUCTIONS FOR RENTERS
DEAR BOB: In early 2005, we bought a house that we rented to our son and daughter-in-law who were having tough financial times. Since then, our son got a great job, his wife got pregnant and presented us with our first grandchild, and all is very well. However, title to the house is in our names. But our son and daughter-in-law pay all the expenses, such as mortgage payments, property taxes, and maintenance. We don’t need the tax deductions. How can we transfer those deductions to our tenants for 2005, since they badly need more tax deductions? –Rodney R.
DEAR RODNEY: You can’t. Although your son and daughter-in-law actually paid the mortgage payments, property taxes, and other expenses, their names were not on the title nor did they have a legal right to buy the house, such as with a contract for deed, installment land contract, or other document.
However, for 2006, you could entitle them to claim the tax benefits for the tax-deductible expenses they pay by adding their names to the title to the house. For details, please consult your tax adviser.
The new Robert Bruss special report, “2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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