DEAR BOB: A former friend recently went through a divorce and his finances are a mess. To help him out, we offered to buy out his condo equity of about $21,000 for cash. He gave us a quitclaim deed, which we recorded. We bought “subject to” its existing mortgage. However, he “forgot” to tell us the condo homeowner’s association has an $8,700 special assessment lien against the condo. When I confronted him, he said he was sorry but he had forgotten about the lien, which the association now threatens to foreclose on us. He doesn’t have any money to pay us the $8,700. Do we have any recourse? –Nancy T.
DEAR NANCY: If you don’t pay the $8,700 condo assessment lien before the association forecloses, you could lose the condo. Yes, your friend is liable to you for the $8,700, but, if he can’t afford to pay you, suing him to obtain a judgment might not be worth the hassle.
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Your situation shows the importance, especially when buying real estate from a friend or relative, to always obtain an owner’s title insurance policy. If you had done so, the owner’s title policy would have revealed that recorded $8,700 homeowner’s association lien and you could have deducted the $8,700 from the $21,000 cash you paid to your former friend.
$800 MONTHLY NEGATIVE CASH FLOW CAN BE PAINFUL
DEAR BOB: After a recent divorce, I purchased a townhouse. Since my girlfriend and I are considering getting a bigger place, I am thinking about renting the townhouse because, if I sell it now, I would have to pay about $30,000 to get out of the house. Based on nearby comparable rentals, if I rent the townhouse I will lose about $800 per month (difference between the mortgage payment and rental income). I’m hoping that by losing $9,600 per year for one or two years, the local market will appreciate and make the eventual townhouse sale less painful. Am I required to depreciate the townhouse on Schedule E of my income tax returns? As I will have an “unclaimed” excess mortgage interest deduction (the monthly rent won’t cover the mortgage interest), can I claim the remainder of the mortgage interest on my Schedule A itemized deductions? –Cory F.
DEAR CORY: I hope you are a very wealthy man who can afford $800 monthly negative cash flow. Please consult your personal tax adviser because you are acting under several erroneous tax considerations.
The first one is depreciation must be deducted for a rental property even if that depreciation deduction doesn’t save you any income tax and provides no immediate tax benefit. You must depreciate the townhouse (but not the value of the underlying land) at a 27.5-year, straight-line rate.
The second one is unused rental property mortgage interest is only deductible on Schedule E of your tax return. The unused portion cannot be deducted as a personal itemized interest deduction on Schedule A of your tax returns.
If your rental townhouse shows a tax loss, as it surely will, presuming you are not a “real estate professional” such as a full-time sales agent entitled to unlimited passive activity loss deductions, you can deduct up to $25,000 tax loss per year against your ordinary income if your AGI (adjusted gross income) is below $100,000.
The good news is any undeducted loss from your rental townhouse can be “suspended” to save for use in future tax years or when you sell the property at a profit. Frankly, if I were in your situation I would stay in the townhouse and forget about renting it. If your girlfriend insists on a bigger home, maybe she’s not right for you.
THE KEY REASON A HOUSE HASN’T SOLD SINCE APRIL
DEAR BOB: My wife and I have had our house on the market since April but have had no offers yet. We’ve been competitively priced and are going to take the house off the market for the holidays. After New Year’s, we are thinking of putting it back on the market ourselves without a listing agent. Then we can afford to sell for less without a sales commission. We understand we will lose the benefit of the multiple listing service (MLS), but it hasn’t helped much so far. What happens if we do that and the buyer has an agent? –Frank G.
DEAR FRANK: Presuming your house has been listed for sale since April with a successful sales agent in your vicinity, the key reason it hasn’t sold is probably because it is overpriced.
Just in case you are not aware, most areas are in a “buyer’s market,” meaning there are many more homes for sale than there are qualified buyers actively looking.
Taking your home off the market during the holidays is a good idea. You don’t sound very motivated to sell, and your house is a “tired listing,” so give it a rest for a while.
If you couldn’t sell your home with an agent, what makes you think you could sell it without one? Should a prospective buyer who has a buyer’s agent decide to buy, you will be asked to pay half of a sales commission to that agent, typically 3 percent of the gross sales price.
I do not recommend you try to sell your home alone in this buyer’s market without a listing agent. More details are in my special report, “How to Sell Your House or Condo for Top Dollar in a Buyer’s Market,” 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.
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