News
01-05-2007, 07:16 PM
Buyers, Mind Your Own Business?
By Robert J. Bruss
Saturday, January 6, 2007
Q: DEAR BOB: As a real estate agent, I must strongly disagree with you. Several weeks ago, you said home buyers (or the buyer's agent) should ask the seller, "Why are you selling your home?" That's none of the buyer's business. I specialize in listing homes and I frequently encounter distress situations, such as divorce, pending foreclosure, illness and other reasons for selling that have nothing to do with the desirability of the residence. All the seller wants is a cash sale. Don't you agree? -- John T.
A: DEAR JOHN: No. It is the buyer's business why the seller is selling. As a longtime (40-years-plus) real estate investor, I've learned it pays to know this so I can tailor my purchase offer to meet the seller's needs.
To illustrate, if the seller is in the foreclosure process, buyers need to know so they can get the sale closed fast before the foreclosure auction. Or if the reason for the sale is a divorce, that usually means an all-cash sale is required to divide the money equally.
Many times I've bought investment property where the sellers were moving to a retirement community. Especially if the house is free and clear with no mortgage, I discovered retiree sellers eagerly carried back mortgages that gave me easy financing and gave them excellent secured retirement income.
Smart buyers and their buyer's agents need to know why the seller is selling. A few sellers will lie. But my experience has been that most tell the truth and all parties benefit.
DEAR BOB: On the home seller disclosure form, our seller said there were no defects. But we discovered the 1926 windows were painted shut and some of the cords were cut. Are those defects? -- Marianne R.
DEAR MARIANNE: Perhaps your seller misunderstood the question, lied or wasn't aware of the window defects.
Personally, in my house I rarely open the windows. In the winter I have the heat on and in the summer the air conditioner is on much of the time so the windows are closed almost every day.
If you think the seller owes you damages for fixing the windows, your problems are proving the seller knew of the defects and determining the amount of your repair cost damages.
Since the house was built in 1926, if you take the seller to small claims court, the judge is likely to say, "You bought an old house so you shouldn't expect it to be in perfect condition." Or, the seller might settle for a modest amount before trial. But it could be a total waste of your time if you lose and get nothing.
DEAR BOB: My father died without a will 25 years ago. He owned a small cabin by a lake in the mountains in northeastern Pennsylvania. My brother, three sisters and I are his only heirs. One of my "local" sisters living near the cabin is the estate administrator, which consists only of the cabin. The estate has never been probated. My brother, another sister and I live quite a distance away. The property taxes have been paid. But the cabin is in terrible disrepair and in danger of collapse. I offered to buy out my siblings for fair market value to fix up the cabin and make it available for their use. All have agreed to sell me their shares except for the sister who is the administrator. The place holds good memories for all of us and I don't want it to fall into non-family hands. In a partition lawsuit, does the court have to order a public sale or can the judge convince the hold-out sister to sell me her share? -- Norm B.
DEAR NORM: Because your father died without a will, your first step is to open a probate proceeding for your late father's estate in the probate court where he was a resident when he died. A local probate lawyer should be hired to do this.
Unless a probate court proceeding has been opened, the sister you said is the "administrator" has no legal authority unless appointed by the court.
After the cabin title is distributed by the probate court to the sibling heirs, then you all can decide what to do with the cabin. If the hold-out sister refuses to sell, you can't force her to sell to you.
Your only legal recourse is to bring a partition lawsuit to force the sale of the cabin with the sales proceeds divided among the co-owners. That doesn't sound like what you want. However, bringing such a lawsuit might push the uncooperative sister to sell to you.
DEAR BOB: I want to make my mortgage payments when I get paid, on the first and 16th of each month. I started doing this by making half of my November payment on Oct. 16 and the other half on Nov. 1. The full payment was thus received by the lender before the past due date of Nov. 10. I did this again for the December payment, half on Nov. 16 and the other half on Dec. 1. However, the loan servicer is now trying to make me pay a late fee because I did not make the "full payment" by the past due date. The mortgage agreement says nothing about how many payments I should make, just that "full payment" must be paid on the first of each month. The loan servicer says I can call them each month to resolve this, but their system doesn't allow for partial payments. I spent 20 years designing consumer loan computer systems so I know this major bank can do anything management wants. They offered me a biweekly mortgage, with extra fees, but that's not what I want. What can I do about this? -- Linda H.
DEAR LINDA: Don't waste your time fighting your nasty loan servicer. You will lose. Mortgage lenders do not have to accept partial payments such as you attempted to make. I'm surprised your partial payment wasn't returned to you.
If your goal is to reduce your total mortgage interest by cutting the life of your 30-year mortgage, you can accomplish the same result as a biweekly (every two weeks) payment mortgage. This is done by dividing your monthly principal and interest payment (not including property tax and insurance escrow) by 12 and adding that extra principal amount to each regular monthly payment.
The result will be making 13 monthly payments every 12 months and cutting your mortgage to about 22 years (the same result as a bi-weekly mortgage but without any extra cost).
DEAR BOB: Is it the industry standard that if a buyer defaults on a contract to buy a house, the agent gets to keep the deposit, or does the seller get to keep all or part of the deposit? -- Robert M.
DEAR ROBERT: There is no "industry standard." Read your sales contract to determine what happens to the defaulting buyer's good-faith earnest money deposit.
The deposit should be held by a third party, such as in the realty broker's trust account, a lawyer's trust account or at a title/escrow company. But it belongs to the home seller. When a buyer defaults, the seller is entitled to keep that deposit, subject to the terms in the sales contract and applicable state statutes.
Some home sales contracts have a "liquidated damages" clause. That means if the buyer defaults, the amount of the buyer's deposit is the limit of the seller's damages and the seller cannot sue the buyer for further damages, such as lost sales profit.
Just to complicate matters, the sales contract often says the listing agent is to receive part of any forfeited deposit. When all else fails, read the sales contract.
DEAR BOB: I leased my renovated condo to two ex-nuns for a year. I told them I was going to sell, and they agreed. But when they returned home from work one day to find a real estate agent's lockbox on their door, they panicked. The agent removed it. But the ex-nuns say they signed a one-year lease and don't want any disturbance to their lives. Am I locked in until the lease expires in April, missing the spring sales season? They won't even agree to a 24-hour notice before a showing -- Patty H.
DEAR PATTY: It sounds like those ex-nuns understand real estate law. If they have a one-year lease, you can sell the condo but the buyer purchases "subject to" the terms of the lease.
Unless your buyer is an investor who wants tenants, most prospective buyers aren't interested in buying a condo that has a lease until April.
If the lease doesn't provide for showing the property to prospective buyers during the lease term, you and the real estate agent have no legal right to enter the condo to show it to prospects.
The fact you mentioned your plan to sell the condo is irrelevant. In real estate, everything must be in writing to be legally enforceable. For more details, please consult a local real estate agent.
DEAR BOB: I want to sell my second or vacation home and avoid the profit tax. I was told if I sell and reinvest the profits in another home I can avoid the tax. But I have considered moving into my second or vacation home to establish it as my primary home so I can avoid the tax. Another friend told me I have to live there three years to qualify. Is that true? -- Donald P.
DEAR DONALD: Your friends are giving you incorrect information.
For a home to qualify as your principal residence, you must own and occupy it as your primary residence at least 24 of the last 60 months before its sale. Then you can qualify for up to $250,000 tax-free principal-residence-sale profits, thanks to Internal Revenue Code 121. A qualified married couple filing a joint tax return in the year of the sale can claim up to $500,000 tax-free capital gains.
Buying a replacement residence has no effect on this benefit. Full details are available from your tax adviser.
DEAR BOB: My father, 85, owns and lives in a house in Las Vegas. I am the executor of his will. It says when he dies, all his property is to be divided between my sister, brother and myself. But now he is considering selling his house and buying a plot of land in New Mexico, adjoining my sister's property. He will bring in a mobile home to live in. If that occurs, what are my obligations concerning that property? Does my father need to re-write his will? -- Marsh R.
DEAR MARSH: Until your father dies, his will has no effect. As executor of that will, you have no duties until he dies.
He can do whatever he wishes with his assets. If his will leaves you and your siblings an asset he no longer owns at his death, namely the Las Vegas house, it's your tough luck. You inherit nothing.
If he moves and buys the New Mexico land and mobile home, you might then suggest he write a new will to distribute that property upon his death.
DEAR BOB: I own a house in a state where the law says there can be a mortgage prepayment penalty only during the first three years of the mortgage term. However, my mortgage from a major nationwide lender says I have a prepayment penalty for the first five years. Which is correct? -- Emil T.
DEAR EMIL: Presuming you are correct about the three-year limit on residential mortgages in the state where your home is located, that state law prevails over any conflicting term in the mortgage agreement.
Because nationwide lenders do business in most states, their mortgage documentation doesn't always comply with state laws. If in doubt, have the situation reviewed by a real estate lawyer where the property is located.
DEAR BOB: I just had a very bad experience with my home mortgage company. For the last few years, I have been paying my mortgage on the Internet each month. I always included an extra $100 to $500 principal payment. However, my mortgage was recently sold to a new loan servicer. I was shocked to discover all my extra mortgage principal payments have been credited to my escrow account, which is supposed to pay my property taxes and homeowner's insurance when they come due. The result is I have several thousand extra dollars in that account. But none of my extra principal payments have reduced my mortgage balance. As I was expecting to save thousands of dollars of interest, what can I do now since my old loan servicer is gone? -- Brian Y.
DEAR BRIAN: Online mortgage payments are especially dangerous for borrowers because you never know for sure if extra principal payments are being properly credited to reduce your mortgage balance and save interest dollars.
At this point, it will be a nightmare trying to get your former loan servicer to straighten out the mess. If I were in your situation, I would phone your new loan servicer, explain the problem, and ask that the surplus in your escrow account be credited to reduce your mortgage principal balance.
The result will be to save interest from now on, although you lost out on past interest savings that should have been accruing to you each month.
If you continue making online mortgage payments be sure to check each monthly payment to be certain it is properly credited to your principal and interest, escrow account, and for principal reduction if you make extra principal payments each month.
DEAR BOB: My wife and I own our home, which is located adjacent to two vacant lots, one on each side of our house. We recently sold one of the lots at a large profit. A friend told me he read in your column that our profit on the lot sale adjoining a principal residence is tax-free. Is this true? Can we also sell the other lot tax-free? -- Marilee S.
DEAR MARILEE: Internal Revenue Code 121 says your capital gain from the sale of a lot adjoining your principal residence can be tax-free if you also sell your principal residence within 24 months before or after the lot sale. That presumes you owned and occupied your principal residence at least 24 of the last 60 months before its sale.
However, this exception for the sale of an adjoining lot applies to one lot sale only. When you sell the lot on the other side of your principal residence, it will be fully taxable as a capital gain.
Of course, if you don't sell your principal residence within 24 months of the lot sale, then the lot sale profit is taxable.
DEAR BOB: We bought our home at the top of the market in early 2005. Now we have to sell due to a divorce and other reasons. After paying the selling costs, if we are lucky we will have a loss of about $50,000. Can we deduct this on our tax returns? -- Royce C.
DEAR ROYCE: No. A loss on the sale of your personal residence is not tax deductible.
DEAR BOB: I am buying my first home in the next couple of months from my aunt and mother. They're inheriting my grandmother's home. But neither of them wants to keep it. What is the best way to go about this family purchase? -- James M.
DEAR JAMES: Your aunt and mother first need to obtain marketable title from your grandmother's estate. This is very important. The reason is their adjusted cost basis is the home's market value on the date of grandmother's death.
If they sell the house to you shortly thereafter, for the same market value, they will owe zero capital gains tax.
Of course, as a prudent buyer, be sure your purchase is handled by a reputable real estate lawyer or title company and obtain an owner's title insurance policy showing you acquired marketable title.
If the house is free and clear with no mortgage to be paid off, you might ask your aunt and mother if they would like to finance your mortgage so you don't have to obtain a mortgage from an outside lender.
Because they know, trust and love you, they are likely to say "yes." Offer them a fair interest rate, which is perhaps 6 percent in today's market. That's a great investment for them and easy financing for you.
By carrying back the mortgage for you, they will be creating excellent mortgage interest income for themselves, secured by the house. If you default, they can foreclose and get the house back to sell to someone else.
DEAR BOB: My husband and I own a house worth about $375,000. It has a water seepage problem. We are in the process of a divorce and want to sell the home in the early spring. We are trying to fix the water problem before then. But I am hoping to buy him out. How should I go about doing this? -- Marian R.
DEAR MARIAN: Sorry, I can't help you with that water seepage problem. But divorce buy-outs by one spouse are very common. The first step is to get a professional appraisal of the house so you both can agree on the home's fair market value.
Be sure both parties agree on the selection of the appraiser. If that's not possible, an alternative is for each spouse to hire his or her own licensed appraiser and then average the two appraisals to arrive at a fair market value.
As for financing your buy-out of your husband's share of the property, this is usually done by refinancing the mortgage, unless you have lots of spare cash.
When agreeing on the buy-out amount, don't forget to reduce the home's market value by the amount of selling expenses that will be saved, such as the realty sales commission and transfer costs. Be sure your divorce lawyers review and approve the buy-out agreement.
DEAR BOB: Within the next year, I want to sell my home and move to a better climate. But my problem is I am single so I only will have a $250,000 tax exemption. However, my estimated home sales price will be around $425,000. Can I use one of those tax-deferred exchanges you write about to avoid tax? -- Carl T.
DEAR CARL: A tax-deferred exchange is appropriate for rental properties. But that is not your situation.
You left out a key fact. What is your adjusted cost basis for the home?
That is usually your purchase price, plus most closing costs you didn't deduct in the year of purchase, plus capital improvement costs, minus any depreciation deducted, such as for business use of your home. Subtract your home's adjusted cost basis from the net (adjusted) sales price to arrive at your capital gain.
For example, suppose $125,000 is your home's adjusted cost basis and $400,000 is your net adjusted sales price after subtracting selling costs. The result is a $275,000 long-term capital gain (presuming you owned and occupied your home at least 24 of the last 60 months before its sale).
Applying your $250,000 principal-residence-sale tax exemption, thanks to Internal Revenue Code 121, means you have only a $25,000 taxable capital gain. At the current federal 15 percent maximum capital gain tax, plus applicable state tax, that's a genuine bargain.
Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, http://www.bobbruss.com.
By Robert J. Bruss
Saturday, January 6, 2007
Q: DEAR BOB: As a real estate agent, I must strongly disagree with you. Several weeks ago, you said home buyers (or the buyer's agent) should ask the seller, "Why are you selling your home?" That's none of the buyer's business. I specialize in listing homes and I frequently encounter distress situations, such as divorce, pending foreclosure, illness and other reasons for selling that have nothing to do with the desirability of the residence. All the seller wants is a cash sale. Don't you agree? -- John T.
A: DEAR JOHN: No. It is the buyer's business why the seller is selling. As a longtime (40-years-plus) real estate investor, I've learned it pays to know this so I can tailor my purchase offer to meet the seller's needs.
To illustrate, if the seller is in the foreclosure process, buyers need to know so they can get the sale closed fast before the foreclosure auction. Or if the reason for the sale is a divorce, that usually means an all-cash sale is required to divide the money equally.
Many times I've bought investment property where the sellers were moving to a retirement community. Especially if the house is free and clear with no mortgage, I discovered retiree sellers eagerly carried back mortgages that gave me easy financing and gave them excellent secured retirement income.
Smart buyers and their buyer's agents need to know why the seller is selling. A few sellers will lie. But my experience has been that most tell the truth and all parties benefit.
DEAR BOB: On the home seller disclosure form, our seller said there were no defects. But we discovered the 1926 windows were painted shut and some of the cords were cut. Are those defects? -- Marianne R.
DEAR MARIANNE: Perhaps your seller misunderstood the question, lied or wasn't aware of the window defects.
Personally, in my house I rarely open the windows. In the winter I have the heat on and in the summer the air conditioner is on much of the time so the windows are closed almost every day.
If you think the seller owes you damages for fixing the windows, your problems are proving the seller knew of the defects and determining the amount of your repair cost damages.
Since the house was built in 1926, if you take the seller to small claims court, the judge is likely to say, "You bought an old house so you shouldn't expect it to be in perfect condition." Or, the seller might settle for a modest amount before trial. But it could be a total waste of your time if you lose and get nothing.
DEAR BOB: My father died without a will 25 years ago. He owned a small cabin by a lake in the mountains in northeastern Pennsylvania. My brother, three sisters and I are his only heirs. One of my "local" sisters living near the cabin is the estate administrator, which consists only of the cabin. The estate has never been probated. My brother, another sister and I live quite a distance away. The property taxes have been paid. But the cabin is in terrible disrepair and in danger of collapse. I offered to buy out my siblings for fair market value to fix up the cabin and make it available for their use. All have agreed to sell me their shares except for the sister who is the administrator. The place holds good memories for all of us and I don't want it to fall into non-family hands. In a partition lawsuit, does the court have to order a public sale or can the judge convince the hold-out sister to sell me her share? -- Norm B.
DEAR NORM: Because your father died without a will, your first step is to open a probate proceeding for your late father's estate in the probate court where he was a resident when he died. A local probate lawyer should be hired to do this.
Unless a probate court proceeding has been opened, the sister you said is the "administrator" has no legal authority unless appointed by the court.
After the cabin title is distributed by the probate court to the sibling heirs, then you all can decide what to do with the cabin. If the hold-out sister refuses to sell, you can't force her to sell to you.
Your only legal recourse is to bring a partition lawsuit to force the sale of the cabin with the sales proceeds divided among the co-owners. That doesn't sound like what you want. However, bringing such a lawsuit might push the uncooperative sister to sell to you.
DEAR BOB: I want to make my mortgage payments when I get paid, on the first and 16th of each month. I started doing this by making half of my November payment on Oct. 16 and the other half on Nov. 1. The full payment was thus received by the lender before the past due date of Nov. 10. I did this again for the December payment, half on Nov. 16 and the other half on Dec. 1. However, the loan servicer is now trying to make me pay a late fee because I did not make the "full payment" by the past due date. The mortgage agreement says nothing about how many payments I should make, just that "full payment" must be paid on the first of each month. The loan servicer says I can call them each month to resolve this, but their system doesn't allow for partial payments. I spent 20 years designing consumer loan computer systems so I know this major bank can do anything management wants. They offered me a biweekly mortgage, with extra fees, but that's not what I want. What can I do about this? -- Linda H.
DEAR LINDA: Don't waste your time fighting your nasty loan servicer. You will lose. Mortgage lenders do not have to accept partial payments such as you attempted to make. I'm surprised your partial payment wasn't returned to you.
If your goal is to reduce your total mortgage interest by cutting the life of your 30-year mortgage, you can accomplish the same result as a biweekly (every two weeks) payment mortgage. This is done by dividing your monthly principal and interest payment (not including property tax and insurance escrow) by 12 and adding that extra principal amount to each regular monthly payment.
The result will be making 13 monthly payments every 12 months and cutting your mortgage to about 22 years (the same result as a bi-weekly mortgage but without any extra cost).
DEAR BOB: Is it the industry standard that if a buyer defaults on a contract to buy a house, the agent gets to keep the deposit, or does the seller get to keep all or part of the deposit? -- Robert M.
DEAR ROBERT: There is no "industry standard." Read your sales contract to determine what happens to the defaulting buyer's good-faith earnest money deposit.
The deposit should be held by a third party, such as in the realty broker's trust account, a lawyer's trust account or at a title/escrow company. But it belongs to the home seller. When a buyer defaults, the seller is entitled to keep that deposit, subject to the terms in the sales contract and applicable state statutes.
Some home sales contracts have a "liquidated damages" clause. That means if the buyer defaults, the amount of the buyer's deposit is the limit of the seller's damages and the seller cannot sue the buyer for further damages, such as lost sales profit.
Just to complicate matters, the sales contract often says the listing agent is to receive part of any forfeited deposit. When all else fails, read the sales contract.
DEAR BOB: I leased my renovated condo to two ex-nuns for a year. I told them I was going to sell, and they agreed. But when they returned home from work one day to find a real estate agent's lockbox on their door, they panicked. The agent removed it. But the ex-nuns say they signed a one-year lease and don't want any disturbance to their lives. Am I locked in until the lease expires in April, missing the spring sales season? They won't even agree to a 24-hour notice before a showing -- Patty H.
DEAR PATTY: It sounds like those ex-nuns understand real estate law. If they have a one-year lease, you can sell the condo but the buyer purchases "subject to" the terms of the lease.
Unless your buyer is an investor who wants tenants, most prospective buyers aren't interested in buying a condo that has a lease until April.
If the lease doesn't provide for showing the property to prospective buyers during the lease term, you and the real estate agent have no legal right to enter the condo to show it to prospects.
The fact you mentioned your plan to sell the condo is irrelevant. In real estate, everything must be in writing to be legally enforceable. For more details, please consult a local real estate agent.
DEAR BOB: I want to sell my second or vacation home and avoid the profit tax. I was told if I sell and reinvest the profits in another home I can avoid the tax. But I have considered moving into my second or vacation home to establish it as my primary home so I can avoid the tax. Another friend told me I have to live there three years to qualify. Is that true? -- Donald P.
DEAR DONALD: Your friends are giving you incorrect information.
For a home to qualify as your principal residence, you must own and occupy it as your primary residence at least 24 of the last 60 months before its sale. Then you can qualify for up to $250,000 tax-free principal-residence-sale profits, thanks to Internal Revenue Code 121. A qualified married couple filing a joint tax return in the year of the sale can claim up to $500,000 tax-free capital gains.
Buying a replacement residence has no effect on this benefit. Full details are available from your tax adviser.
DEAR BOB: My father, 85, owns and lives in a house in Las Vegas. I am the executor of his will. It says when he dies, all his property is to be divided between my sister, brother and myself. But now he is considering selling his house and buying a plot of land in New Mexico, adjoining my sister's property. He will bring in a mobile home to live in. If that occurs, what are my obligations concerning that property? Does my father need to re-write his will? -- Marsh R.
DEAR MARSH: Until your father dies, his will has no effect. As executor of that will, you have no duties until he dies.
He can do whatever he wishes with his assets. If his will leaves you and your siblings an asset he no longer owns at his death, namely the Las Vegas house, it's your tough luck. You inherit nothing.
If he moves and buys the New Mexico land and mobile home, you might then suggest he write a new will to distribute that property upon his death.
DEAR BOB: I own a house in a state where the law says there can be a mortgage prepayment penalty only during the first three years of the mortgage term. However, my mortgage from a major nationwide lender says I have a prepayment penalty for the first five years. Which is correct? -- Emil T.
DEAR EMIL: Presuming you are correct about the three-year limit on residential mortgages in the state where your home is located, that state law prevails over any conflicting term in the mortgage agreement.
Because nationwide lenders do business in most states, their mortgage documentation doesn't always comply with state laws. If in doubt, have the situation reviewed by a real estate lawyer where the property is located.
DEAR BOB: I just had a very bad experience with my home mortgage company. For the last few years, I have been paying my mortgage on the Internet each month. I always included an extra $100 to $500 principal payment. However, my mortgage was recently sold to a new loan servicer. I was shocked to discover all my extra mortgage principal payments have been credited to my escrow account, which is supposed to pay my property taxes and homeowner's insurance when they come due. The result is I have several thousand extra dollars in that account. But none of my extra principal payments have reduced my mortgage balance. As I was expecting to save thousands of dollars of interest, what can I do now since my old loan servicer is gone? -- Brian Y.
DEAR BRIAN: Online mortgage payments are especially dangerous for borrowers because you never know for sure if extra principal payments are being properly credited to reduce your mortgage balance and save interest dollars.
At this point, it will be a nightmare trying to get your former loan servicer to straighten out the mess. If I were in your situation, I would phone your new loan servicer, explain the problem, and ask that the surplus in your escrow account be credited to reduce your mortgage principal balance.
The result will be to save interest from now on, although you lost out on past interest savings that should have been accruing to you each month.
If you continue making online mortgage payments be sure to check each monthly payment to be certain it is properly credited to your principal and interest, escrow account, and for principal reduction if you make extra principal payments each month.
DEAR BOB: My wife and I own our home, which is located adjacent to two vacant lots, one on each side of our house. We recently sold one of the lots at a large profit. A friend told me he read in your column that our profit on the lot sale adjoining a principal residence is tax-free. Is this true? Can we also sell the other lot tax-free? -- Marilee S.
DEAR MARILEE: Internal Revenue Code 121 says your capital gain from the sale of a lot adjoining your principal residence can be tax-free if you also sell your principal residence within 24 months before or after the lot sale. That presumes you owned and occupied your principal residence at least 24 of the last 60 months before its sale.
However, this exception for the sale of an adjoining lot applies to one lot sale only. When you sell the lot on the other side of your principal residence, it will be fully taxable as a capital gain.
Of course, if you don't sell your principal residence within 24 months of the lot sale, then the lot sale profit is taxable.
DEAR BOB: We bought our home at the top of the market in early 2005. Now we have to sell due to a divorce and other reasons. After paying the selling costs, if we are lucky we will have a loss of about $50,000. Can we deduct this on our tax returns? -- Royce C.
DEAR ROYCE: No. A loss on the sale of your personal residence is not tax deductible.
DEAR BOB: I am buying my first home in the next couple of months from my aunt and mother. They're inheriting my grandmother's home. But neither of them wants to keep it. What is the best way to go about this family purchase? -- James M.
DEAR JAMES: Your aunt and mother first need to obtain marketable title from your grandmother's estate. This is very important. The reason is their adjusted cost basis is the home's market value on the date of grandmother's death.
If they sell the house to you shortly thereafter, for the same market value, they will owe zero capital gains tax.
Of course, as a prudent buyer, be sure your purchase is handled by a reputable real estate lawyer or title company and obtain an owner's title insurance policy showing you acquired marketable title.
If the house is free and clear with no mortgage to be paid off, you might ask your aunt and mother if they would like to finance your mortgage so you don't have to obtain a mortgage from an outside lender.
Because they know, trust and love you, they are likely to say "yes." Offer them a fair interest rate, which is perhaps 6 percent in today's market. That's a great investment for them and easy financing for you.
By carrying back the mortgage for you, they will be creating excellent mortgage interest income for themselves, secured by the house. If you default, they can foreclose and get the house back to sell to someone else.
DEAR BOB: My husband and I own a house worth about $375,000. It has a water seepage problem. We are in the process of a divorce and want to sell the home in the early spring. We are trying to fix the water problem before then. But I am hoping to buy him out. How should I go about doing this? -- Marian R.
DEAR MARIAN: Sorry, I can't help you with that water seepage problem. But divorce buy-outs by one spouse are very common. The first step is to get a professional appraisal of the house so you both can agree on the home's fair market value.
Be sure both parties agree on the selection of the appraiser. If that's not possible, an alternative is for each spouse to hire his or her own licensed appraiser and then average the two appraisals to arrive at a fair market value.
As for financing your buy-out of your husband's share of the property, this is usually done by refinancing the mortgage, unless you have lots of spare cash.
When agreeing on the buy-out amount, don't forget to reduce the home's market value by the amount of selling expenses that will be saved, such as the realty sales commission and transfer costs. Be sure your divorce lawyers review and approve the buy-out agreement.
DEAR BOB: Within the next year, I want to sell my home and move to a better climate. But my problem is I am single so I only will have a $250,000 tax exemption. However, my estimated home sales price will be around $425,000. Can I use one of those tax-deferred exchanges you write about to avoid tax? -- Carl T.
DEAR CARL: A tax-deferred exchange is appropriate for rental properties. But that is not your situation.
You left out a key fact. What is your adjusted cost basis for the home?
That is usually your purchase price, plus most closing costs you didn't deduct in the year of purchase, plus capital improvement costs, minus any depreciation deducted, such as for business use of your home. Subtract your home's adjusted cost basis from the net (adjusted) sales price to arrive at your capital gain.
For example, suppose $125,000 is your home's adjusted cost basis and $400,000 is your net adjusted sales price after subtracting selling costs. The result is a $275,000 long-term capital gain (presuming you owned and occupied your home at least 24 of the last 60 months before its sale).
Applying your $250,000 principal-residence-sale tax exemption, thanks to Internal Revenue Code 121, means you have only a $25,000 taxable capital gain. At the current federal 15 percent maximum capital gain tax, plus applicable state tax, that's a genuine bargain.
Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, http://www.bobbruss.com.