DEAR BOB: I plan to sell my home in the next few months. Is it wise to have a professional home inspector prepare a report before I list my house for sale so I can use his findings to help establish the sales price? One Realtor tells me I should not have the report made because if buyers rely only on his report, then I am liable if the inspector misses something. The Realtor says home buyers in my area usually will not have their own inspection done if I had one available and therefore I am taking on more liability. What is your opinion? –Mary B.

DEAR MARY: I strongly disagree with that Realtor. Every home seller should have a pre-listing professional home inspection, as well as other customary local inspections, such as for termites, dry rot, energy efficiency, building-code compliance, etc.

Purchase Bob Bruss reports online.

Then you will know the condition of your home and if it has any serious defects you should repair before listing the home for sale. Savvy home buyers always have their own professional inspections. Unless asked, you don’t even have to show your inspection reports obtained before listing. Buyers should be encouraged to hire their own inspector after you have accepted their purchase offer.

After you have obtained the inspections and decided to either repair defects or disclose them to prospective buyers, be sure to interview at least three successful local real estate agents who sell homes in your vicinity.

Each agent interviewed should prepare a written CMA (comparative market analysis). This form shows recent sales prices of nearby homes like yours, asking prices of similar neighborhood homes (your competition), and even recently expired competitive listings (usually overpriced).

The CMA form also shows each agent’s recommended asking price and probable sales price for your home. Only after you have at least three CMAs are you ready to select the best agent to get your home sold.


DEAR BOB: I plan to sell my home and move out of state to a lower-cost area. I have about $300,000 profit in a rental property on which I want to do a 1035 exchange. At the new location, comparable properties are worth about $250,000, so I plan to trade for two properties. Must I transfer all my profits from the 1035 exchange to the new properties, or can I finance the properties with a new mortgage and pull out some of the profits? How soon after making the 1035 exchange can I convert one rental property into my personal residence? –Pete R.

DEAR PETE: It’s called an Internal Revenue Code 1031 (not 1035) tax-deferred exchange. All the properties must be held for investment or use in a trade or business. Your personal residence is not eligible.

To qualify for such a trade, often called a “Starker exchange,” you must trade equal or up on both total price and equity. That means you can’t take out any taxable “boot,” such as cash without owing capital gain tax on that “unlike kind” personal property.

Yes, you can trade up one property for two (or more) properties, as long as you meet the basic test of exchanging equal or up on both total cost and equity. That means you can’t receive any net mortgage relief or put cash in your pocket.

However, after the tax-deferred exchange is completed, you can refinance the acquired properties to take out tax-free cash.

IRC 1031 does not say how long an acquired property must be held as a rental before converting it to your personal residence, but most tax advisers suggest renting it for at least six to 12 months before converting. Ask your tax adviser for further details.


DEAR BOB: I have seen endless mentions in your articles about living in your principal residence at least two of the last five years before its sale to qualify for that $250,000 tax exemption (up to $500,000 for a qualified married couple). But what proof does the IRS require if they question eligibility? How does the seller prove it was the primary residence? –Susan C.

DEAR SUSAN: Unless the home seller is audited, the IRS does not require any proof the Internal Revenue Code 121 principal-residence-sale requirements were met. If you qualify for the full exemption, up to $250,000 for a single principal-residence seller, or up to $500,000 for a qualified married couple filing a joint tax return, you don’t even report your principal-residence sale on your income tax returns.

If the IRS should question your eligibility, you will need proof the home was your principal residence. Evidence could include utility bills, voter registration, driver’s license, filing income tax returns from your principal residence sold, bank accounts, and nearby employment.


DEAR BOB: Two sisters, both over 72, inherit a house. Their dad purchased it in 1964 for $30,000. It is now worth $750,000. If they sell it before they die, what is the rate of capital gains tax? –Gregory D.

DEAR GREGORY: The adjusted cost basis of the house for the two sisters (their ages are irrelevant) was its “stepped-up basis” fair market value on the date of dad’s death. If they made any capital improvements during ownership, the improvement cost is added to this stepped-up basis.

When they sell the house for more than their basis, the excess is their taxable capital gain.

For example, suppose the house was worth $300,000 a few years ago when dad died. They added $100,000 of capital improvements during their ownership. Their basis is therefore $400,000. If they sell it for $750,000 net, presuming it is not their principal residence, they have a $350,000 taxable capital gain.

They will owe the current maximum long-term capital gain tax rate of 15 percent on their capital gain, plus applicable state tax where the house is located. For more details, they should consult their tax adviser.


DEAR BOB: Unexpected mortgage junk fees seem to be a cruel surprise at the closing settlement, imposed after all the emotional investment in a new house has been made by the borrowers. Sitting at the closing table, with the prospect of losing your new house, makes it almost impossible to walk away and not pay the lender’s junk fees. It seems the mortgage lender’s “good faith estimate” given to the borrower earlier is worthless and unenforceable. But what about another approach? Could the borrower pay the junk fees and then sue the lender in local Small Claims Court for a refund? Has this approach been used successfully? –Walter L.

DEAR WALTER: For readers not familiar with mortgage junk fees, they are charges imposed on borrowers by the lender for services that do not provide a specific borrower benefit.

Junk fee examples include underwriting fee, administration fee, warehouse fee, documentation fee, loan review fee, preparation fee, and other names dreamed up by lenders. Examples of legitimate non-junk mortgage fees for specific services include appraisal fee, title insurance fee, attorney or escrow fee, and credit report fee.

Small Claims Court decisions don’t get publicly reported so there is no way to know your chance of success. It’s worth a try, but be sure to make clear in writing at the closing you are paying the lender’s previously undisclosed last-minute junk fees under duress.


DEAR BOB: We rented a house on a one-year lease based on the rental property manager’s promise to landscape the backyard. But we failed to put it in writing. The manager promised to have it installed by Oct. 1. It is now January and we still have just dirt in the back yard. He says he’s a man of his word “where a handshake still means something.” But the owner can’t afford to put in the landscaping now. We’re tired of dirt and rocks in our back yard. Can we break our lease? –Ron F.

DEAR RON: In real estate, verbal agreements mean nothing. You should have obtained that landscaping promise in writing, signed by the owner (not just the property manager).

If you break the lease, due to failure of consideration, and the landlord takes you to court, it is up to the judge to decide if you were justified.

However, when a tenant breaks a lease, the owner has a duty to mitigate damages by attempting to re-rent. At worst, you probably would only be liable for a few months of rent while the house is vacant. For more details, please consult a local real estate attorney.

The new Robert Bruss special report, “The 10 Key Questions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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 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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