DEAR BENNY: I am a seller with a $620,000 home in Oregon. As part of the inspection addendum, the buyers are demanding that we put down a $500 security deposit with the title company, refundable if there is no damage to the home between now and move out. Our home is in superb condition. I assume that the refund of our money would be based on the buyers’ subjective opinion, since they included no specifics of how they would determine if we would receive the money back. (They also have asked for every single nit-picky item that the inspector found to be remedied.) What are the pitfalls of agreeing to put down this deposit and how do we protect ourselves? –Shelly

DEAR SHELLY: I suspect that you will never get any of the $500 back. So here’s my suggestion: Just agree to give them $500 when you go to closing, on the condition that they agree to take the house on an "as is" basis — as of the date of the home inspection. Don’t waste time with the escrow; you will be haggling over more "nits" forever.

If your buyer does not agree to this credit, then at the very least I would put a time limit on when the escrow is to be released. Two weeks should be more than adequate.

DEAR BENNY: We bought a condominium vacation home for cash. The title company (a large, national company) was to pay off the seller’s mortgage at closing, and we have an owner’s title policy. The seller’s lender has not filed any discharge or release of mortgage with government officials and we have learned that the small, private mortgage lender is in disarray and will probably soon be out of business as a result of the mortgage crisis. Although we would like a clean title to the property on the public records, we do not think that the proper documents will be filed by the lender. We take some comfort from the fact that our title policy covers us. Are we correct in our thinking and do you have any other thoughts on this topic? I assume that with the mess in the mortgage market and many companies going out of business, other people might be in this same predicament. –Diane

DEAR DIANE: When a mortgage (also called a deed of trust) is obtained, it is recorded among the land records in the jurisdiction where the house is located. When the loan is paid off — whether by a refinance or a sale — the original mortgage must be released from the land records.

I am surprised that the title (or escrow) company that issued you the owner’s title insurance policy did not make the arrangements to record the appropriate release. In my opinion, you need not look to the old lender. You had nothing to do with them. You should immediately demand that the title insurance company that issued your policy take care of this.

Yes, you can rely on that title policy. But until the old mortgage is, in fact, released from land records, it will continue to crop up — when you sell or try to refinance. You might as well take care of it now.

DEAR BENNY: In 1984, my husband and I purchased a very unfinished house in New Hampshire and proceeded to finish it and live there for almost 10 years. We kept and recorded every receipt to document actual costs since we did the work ourselves. In 1994, we sold that house and bought land in Virginia and proceeded to build another house, barely making it in before the two-year capital gains tax deadline from our previous sale, thereby deferring the taxes on the meager profit (it was a recession in New Hampshire at that time). We hope to stay put for many years to come, but one never knows.

My question is this: Since the capital gains tax laws have changed and the two-year deadline is (hopefully) dead and buried, how long do we need to keep those receipts from the New Hampshire house, which was sold more than 13 years ago? Are we someday going to have to "settle" the capital gains on that sale or is there some statute of limitations or dismissal of such previous gains due to the change to the $250,000/$500,000 allowable gain for the sale of a primary residence? –Laura

DEAR LAURA: I think you would be wise to hang on to all of the receipts from the first house. Remember that before 1996, there were two benefits available to homeowners: the rollover, and the once-in-a-lifetime exclusion of up to $125,000 of gain.

Let’s take this example: You bought your New Hampshire house in 1984 for $10,000. You added $10,000 in improvements, so your adjusted basis is $20,000. You sold that house for $50,000. Your gain for tax purposes was $30,000.

You bought the new property for $50,000. Under the old rollover rules, if within two years before or after the date you sold your old house you bought (or in your case built) a new house with a cost equal to or greater than the sales price of the old home, you were able to defer your gain and not pay capital gains tax to the IRS.

But — and here’s the rub that will haunt a lot of people — the basis of your new house is deducted by the amount of the gain you deferred. So, in our example, although you paid $50,000 for it, in tax terms its basis was only $20,000 ($50,000 minus $30,000).

So when you sell your new house, while you will be entitled to the up to $500,000 exclusion of gain ($250,000 if you file a separate or single tax return), you have to take into account the gain that was deferred.

Clearly, this is academic if you did not make more than $500,000. But in our example, if you sell the current house for more than $520,000, you will no doubt have to pay some capital gains tax.

Hey! You made a healthy profit so you should pay some tax. But should you get audited, it’s always helpful to have documentation of the improvements you made — to both houses.

DEAR BENNY: Only my name is on the title, and it is now free and clear of any mortgage. It would seem appropriate to put my husband’s name along with mine on the title, but I was concerned that this would look like new homeowners and that our house taxes would go up — and they are bad enough already! We have lived here a long time, but we are thinking of selling within a few years and our profit will probably be over the $250K, so putting him on the title would alleviate the taxes on profits with the "exclusion of gain" you mention. Would a quitclaim deed put his name on the title for purposes of sale at a later date and allow us the "exclusion of gain"? We are trying to save monies and would like to downsize at some point, allowing us some cash flow to invest and live off. –Jackie

DEAR JACKIE: Unless there are other reasons for keeping your husband off of the title (such as he is a doctor and is concerned about malpractice lawsuits), I think you should immediately arrange to put his name on the title with you. I cannot believe that this fact alone would cause your real estate tax to increase.

To my knowledge, in many (if not all) jurisdictions there is no recordation or transfer tax imposed when a spouse is added to title.

For married couples who file a joint tax return, in order to take advantage of the up-to-$500,000 exclusion of gain allowed by the tax law, you or your husband have to own the house for two years out of the five years before it is sold; both spouses must live in the house for two out of the five years before it is sold; and neither spouse has taken the exemption within the prior two years.

DEAR BENNY: We are in a second marriage and we both have two grown children. We keep our money separate. We have paid off our mortgage jointly, but my name is not on the title. Our will states one half of the home to me and the other to his children. If he dies first, I would pay them their share and stay in the house. If I die first my children have no claim. Does that sound like it will work? –Donna

DEAR DONNA: If you want to disinherit your children, you are partly correct. You are not on title. Accordingly, if you die first, you husband will still own the entire house, and on his death, his last will determines control.

But if he dies first, his children may have more rights under applicable state law. You should check this out with your attorney.

And while you are meeting with a lawyer, make sure that you personally have a will. I am confused by what you mean by "our will." Every person should have his or her own last will and testament.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to


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