Home seller stuck with capital gains tax

Monday, June 28, 2004
By Robert J. Bruss
Inman News

DEAR BOB: We've been learning from your real estate articlesfor many years but haven't seen our issue discussed before. We own two homes.One is our main home. The other is our weekend townhome, which we have neverrented to tenants. We have decided to sell the townhome and replace it with ahome in Florida. Can we use that $500,000 home sale exclusion you oftendiscuss? Or can we roll the proceeds of the sale into the Florida purchase toavoid tax liability? Carl D.

DEAR CARL: Because your townhome is not your principalresidence, and you have not owned and occupied it as your primary home at leasttwo of the last five years before its sale, it does not qualify for the$250,000 per seller tax exemption of Internal Revenue Code 121.

Purchase Bob Bruss reports online.

Since it has not been rented to tenants, it also doesn'tqualify for an Internal Revenue Code 1031 tax-deferred exchange.

But you might consider renting it to tenants before selling,perhaps on a lease with option to buy, so it can qualify as investment rentalproperty eligible for an IRC 1031(a)(3) Starker exchange.

If you do that, however, the acquired Florida property willalso have to be "like kind" rental property. Most tax adviserssuggest renting the acquired property at least a year before converting it toyour personal residence. For more details, please consult your tax adviser.

GET A HOME EQUITY CREDIT LINE JUST IN CASE YOU NEED IT

DEAR BOB: Next year I will begin renting my townhouse. Ithas two floors plus a basement apartment with separate front and backentrances. Would it be wise for me to take out a $30,000 home equity loan toremodel the basement apartment to receive possible $1,000 per month rent andthen rent the upstairs for $2,000 or more? Or should I rent the entiretownhouse as a single-family unit for around $2,500? My current mortgagemonthly payment is about $1,000 Traci P.

DEAR TRACI: While you are an owner-occupant, I suggest you obtainas large a home equity credit line as possible (whether or not you ever useit). After you move out and the property becomes a rental, it will be moredifficult and expensive to obtain a home equity credit line.

Most banks love home equity credit lines because (1) theyare so profitable and (2) the default rate is practically zero. They usuallycharge only about $50 annually for such a credit line, with no up-front fees.

Your home equity credit line interest rate should be atprime rate, or lower. It's great to have an extra financial cushion in case youdecide to fix-up that basement apartment, or for any other use you wish.

As for upgrading that basement apartment, I suggest youconsult several local Realtors who are familiar with rentals in your vicinity.They can best advise if your townhouse will easily rent to one family or if itwill be easier to rent to two different tenants.

WHAT IS A QUICK CLAIM DEED?

DEAR BOB: We have a buyer interested in purchasing our homewith a "quick claim deed." We never heard of it. Should we go along? Matt M.

DEAR MATT: A quit (not quick) claim deed conveys whatevertitle the grantor owns in the property. The buyer should always obtain anowner's title insurance policy to be certain of receiving marketable title.

Be sure you have a written sales agreement and the quitclaim deed title transfer takes place at a title company or real estateattorney's office so you don't get swindled by giving the buyer the quit claimdeed before you receive the money. For more details, please consult a localreal estate attorney.

WHY THERE IS NO LIST OF MORTGAGE JUNK FEES

DEAR BOB: Please give me a list of all the mortgage junkfees I should avoid when I close the purchase of my home in a few days RachelK.

DEAR RACHEL: There is no all-inclusive list of mortgage junkor garbage fees. The reason is mortgage lenders are constantly dreaming up newnames for these 100 percent pure-profit unnecessary fees, which they chargebuyers, often at the last minute just before the transaction is ready to close.

The definition of a mortgage junk or garbage fee is acharge, which is not for a specific service that benefits the borrower, and ispaid to a third party. Examples of legitimate mortgage fees paid to a thirdparty include appraisal fee, title fee, escrow or attorney fee, notary fee, andcredit report fee.

Examples of negotiable junk or garbage fees, which go to thelender or the mortgage broker, include underwriting, processing, loan review,administration, document preparation, and even (when the lender can't think ofa name) miscellaneous fee.

If the junk fee wasn't disclosed to you on the lender's"good faith estimate" provided within three days of your loanapplication, it can often be negotiated away.

GET TOUGH WITH LENDER WHO REFUSES TO CLEAR TITLE

DEAR BOB: How can I get my former mortgage lender to recordthe release of my loan, which I paid off almost 15 months ago? But I have notreceived any evidence the loan was cleared from my title. I hired an attorneyto oversee the effort. But all he has done is phone the lender many times,chewing up over $400 in fees so far with no results. Is there a law requiringthe lender to provide mortgage borrowers with proof the title has been clearedand return of the promissory note? Jerome W.

DEAR JEROME: Your attorney should tell you if your state lawprovides a specific time limit for the lender to record either a mortgagesatisfaction or a deed of reconveyance to clear your title.

You are very smart to make certain your title is cleared nowrather than waiting until you sell your property in the future. Perhaps youmight want to do what I did.

Many years ago I had a similar problem. Because my lenderhad no financial incentive, I didn't receive proof of title clearance after Ipaid off a second mortgage.

Then I sued the mortgage lender in local Small Claims Courtfor the maximum allowed for breach of contract. Before the case came up fortrial, the lender recorded a deed of reconveyance and I dropped the lawsuit.

DO HOME BUYERS NEED THEIR OWN REALTY AGENT?

DEAR BOB: My husband and I have been looking over a year fora townhouse to purchase. It will be our first home. We insist it be in the sameschool district our son and daughter now attend. Although we had been workingwith a buyer's agent for three or four months, she wasn't very effective. Bychecking the Internet MLS (multiple listing service) almost daily, my husbandfound a townhouse meeting our requirements. We e-mailed the listing agent whoshowed it to us the next day. The listing agent said if we made our purchaseoffer through her, we could get a bargain price. Since we had no writtencontract with our buyer's agent, we made our offer, which was accepted. But nowour buyer's agent threatens to sue us for half the sales commission. Do youthink we need a buyer's agent and do we owe her a commission? Anita Y.

DEAR ANITA: Yes, it would be desirable for you to have yourown buyer's agent. However, since your buyer's agent was ineffective, I don'tblame you for searching on your own.

Thankfully, you had no written contract with that buyer'sagent. If she sues you, just reply that the statute of frauds requires awritten contract so you have no obligation to her. For more details, pleaseconsult a local real estate attorney.

CAN TENANT GIVE MOVE-OUT NOTICE MID-MONTH?

DEAR BOB: If my tenant pays rent on the first of each month,can the tenant then write me on the fifth of the month giving me a 30-daynotice of moving out? I am so confused Beth J.

DEAR BETH: Unless your month-to-month rental agreement saysa tenant move-out notice can only be given on the first day of the month(that's highly unlikely), either the tenant or landlord can give a move-outnotice on any day of the month.

State law determines the minimum number of days requiredbefore the tenant can move out but the notice can usually be given on any day.For full details, please consult a local landlord-tenant attorney.

The new Robert Bruss special report, "Ten Easy ProfitOpportunities for Home and Investment Property Owners," is now availablefor $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit cardat 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this columnare welcome at either address.

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