DEAR BOB: Many real estate sales contracts provide for mediation and/or arbitration of disputes that might arise after a sale is closed, such as alleged misrepresentation of a property. I recall some time ago you explained the pros and cons of mediation and arbitration, but I misplaced that article. Do you favor either mediation or arbitration of disputes, rather than going to a court lawsuit? –Reginald W.
DEAR REGINALD: The trend is toward mediation and/or arbitration of real estate sales disputes, rather than court trials, which can be very expensive and time-consuming.
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Many printed realty sales contracts allow the buyer and seller to agree to mediate or arbitrate disputes, which might arise later, such as when the seller allegedly failed to disclose a known defect in the home to the buyer.
Mediation means an expert mediator attempts to get the parties to agree on a fair settlement of the dispute. But the mediator has no legal authority to force an agreement. Because most informal mediations are resolved within a day or two, the cost is far lower than a court lawsuit. If the mediator successfully resolves the dispute, he or she should insist all parties sign the settlement agreement before leaving the mediation (to prevent later misunderstandings or change of mind).
But binding arbitration is much different. Before going to trial, the parties can agree to arbitrate their dispute. The arbitrator, chosen by mutual agreement, hears the evidence of both parties and then renders a binding decision, which is then presented to the local court for confirmation.
Although arbitration is usually less expensive and faster than a court trial, the parties give up their legal right to a jury trial, appeal of the arbitrator’s decision, and to court procedures and evidence rules.
As a lawyer, my personal opinion is that it is fine to agree in a real estate sales contract to mediate any disputes that later arise between the parties. However, I do not favor agreeing in advance to give up important legal rights and to arbitrate future disputes.
If a dispute later arises that is not resolved by mediation, at that time the parties can then agree to binding arbitration. But I don’t think it is wise to agree to binding arbitration at the time of signing a purchase contract.
NO GIFT TAX DUE ON MOST PROPERTY GIFTS
DEAR BOB: I am a widow, 74, who plans to move to a lovely assisted-living center in a few months. Several of my friends live there and are very satisfied. I want to give my house to my daughter and her husband who will live in it. They have been very kind to me during several recent illnesses. My free-and-clear house is worth about $575,000. However, a friend says I will owe a huge gift tax. The primary reason I want to give the house away now is my son, a lawyer, has not been very nice to me and I don’t want him to inherit anything when I die. I have sufficient income so I don’t need to sell the house. Will I owe a large gift tax? –Elsa W.
DEAR ELSA: Unless you have made total non-exempt lifetime gifts exceeding $1 million, you won’t owe any gift tax. However, you must file an IRS gift tax return when you deed the house to your daughter and son-in-law.
After you eventually pass on, your $575,000 lifetime real estate gift will be subtracted from your federal estate tax exemption (currently $2 million if you die in 2006). For full details, please consult your tax adviser.
THE BEST (AND ONLY) BOOK ABOUT PROBATE SALE PROFITS
DEAR BOB: Please recommend the best books on investing in probate properties. –Rachel C.
DEAR RACHEL: As far as I am aware, there is only one up-to-date book about investing in and profiting from probate property purchases. It is “Creating Wealth Through Probate,” by James G. Banks. This excellent 2005 book is available in stock or by special order at local bookstores, public libraries, and www.amazon.com.
SMALL EXISTING MORTGAGE WON’T PREVENT A REVERSE MORTGAGE
DEAR BOB: Can I get a senior citizen reverse mortgage although I have a mortgage balance of about $120,000? My house is worth around $800,000 but will probably be worth $1 million by the time I need the reverse mortgage funds –Karen T.
DEAR KAREN: Presuming all owners of your principal residence are at least 62, you can obtain a reverse mortgage now. However, because a reverse mortgage must be recorded as a first mortgage, $120,000 of the proceeds will be used to pay off your existing first mortgage.
The balance of your reverse mortgage commitment can be used for (1) lifetime monthly income, (2) a credit line (except in Texas), (3) lump sum advances when needed, or (4) any combination. More details are in my special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” 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.
LIVING TRUST BENEFICIARY NEED NOT BE A RELATIVE
DEAR BOB: The title to my home is held in my living trust. If I name a living trust beneficiary who is not a relative, what are the tax implications for the beneficiary when they inherit my home and when they sell it? Are the taxes the same as for a relative? –Ms. B.W.
DEAR MS. B.W.: Unless the home is located in one of the few states that still have an inheritance tax, the tax implications for a non-relative inheriting your home are no different than for a relative.
If your total estate is less than the current $2 million federal estate tax exemption, no federal estate tax should be due after your death.
Your living trust beneficiary will receive a new “stepped-up basis” of market value on the date of your death so only the capital gain exceeding that valuation will be taxed when he or she sells the house. For full details, please consult your tax adviser.
MUST LANDLORD PAY FOR HANDICAPPED ACCESS?
DEAR BOB: I own an older six-unit apartment building. A disabled Iraq War veteran applied to rent a vacant first-floor one-bedroom unit. We agreed it is perfect for him because it has wide doorways for his wheelchair. Frankly, it’s a tough apartment to rent because it is small and on a noisy street. But it about 50 feet from a bus stop where there are handicap-access busses that he can take directly to a nearby college where he plans to study computer technology. The problem is that there are four steps from the public sidewalk to my building’s front door. The veteran’s mother, a lawyer, says federal law requires me to pay for handicapped access to my building. To remove the four concrete steps and create a concrete ramp from the public sidewalk will cost about $4,000. She threatens to sue me. Do I have to pay? –Claudia R.
DEAR CLAUDIA: No. The veteran’s mother is mistaken. The federal Americans with Disabilities Act (ADA) requires residential landlords to allow disabled tenants to install access ramps at their own expense and, if desired by the landlord, to remove such ramps when the tenant vacates.
If the tenant or the applicant’s mother can’t afford to pay the $4,000, perhaps a local civic or veteran’s group can help. Or, because the ramp will make your building more desirable and safer without the steps, perhaps you should split the cost.
PROFESSIONAL APPRAISAL CAN PROVE “STEPPED-UP BASIS”
DEAR BOB: I love your articles and have learned so much about real estate from them. For example, several years ago when I inherited the house where I now live, I had never heard of “stepped-up basis” until I read your articles. Although I have no plans to sell, how do I prove my stepped-up basis? –Stephen B.
DEAR STEPHEN: When I inherited a property in 1991, I had the same issue. My first stop was the local tax assessor’s office. In the jurisdiction when the property is located, I learned the properties are reassessed every year so I made a record of that full-assessed value.
When I checked with several Realtor friends, they told me the assessed value was pretty close to market value. Therefore, it was excellent evidence of my new stepped-up basis to market value.
If I was not satisfied with that property tax assessed value, I would have hired a professional appraiser to establish my “stepped-up basis” for the inherited property. However, if you need to establish the market value of your home as of the time of inheritance, you need an appraiser who can appraise past market value. To find such an expert appraiser, the best source is www.appraisalinstitute.org.
The new Robert Bruss special report, “2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and 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 delivery 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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