Should home buyers accept realty agent’s inspector?

DEAR BOB: We are in the process of buying our first home. From reading your articles the last six months, we know we need a professional inspection so we made it a contingency in our purchase offer. Our buyer’s agent recommended a professional inspector so we went along with that recommendation. My husband accompanied him on the inspection, as you often suggest. But the inspector seemed to know less about construction than my husband does. The inspection report found nothing wrong with the house. But we don’t feel comfortable. Should we have another inspection? – Agnes H.

DEAR AGNES: Yes. Maybe there’s nothing wrong with the house you are buying. What were the professional qualifications of the inspector? Is he or she a member of a recognized professional inspection association, such as ASHI (American Society of Home Inspectors)?

Purchase Bob Bruss reports online.

Just to be double-certain there is nothing significantly wrong with the home you are buying, I suggest you spend $350 or so to have a second inspection. Check the inspector’s qualifications. You can find qualified local ASHI inspectors at www.ashi.com or 1-800-743-2744.

RISKS OF ADDING SON TO YOUR HOME TITLE

DEAR BOB: Why is it a bad idea to add my son’s name to the title to my home, instead of leaving it to him in my will? – LaRue R.

DEAR LaRUE: Many parents add their adult children to their home titles, usually as joint tenants with right of survivorship, to avoid probate. However, unexpected problems can develop, as you know if you’ve read my columns for several months.

Suppose you decide to sell your house, but your son refuses to sign the deed unless you give him half of the sales proceeds. Or, if your son incurs a large judgment against him, which he can’t pay, his creditors can attach his half of the jointly owned house and maybe even force its sale.

A far better alternative is to transfer your home title into your living trust. You then maintain 100 percent control. But when you die, probate costs and delays are avoided for your heirs. Your son can be named your successor trustee to take over after you die.

However, if you become incompetent before dying, perhaps with Alzheimer’s disease, as successor trustee he can then manage your living trust assets for your benefit. Details are in my new special report, “Consumer Awareness Guide to Living Trust Pros and Cons for Avoiding Probate Costs and Delays,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.

WHAT IS EQUITY?

DEAR BOB: Can I have any equity in my condo if I don’t owe anything to the bank? I own my condo. All I owe is the monthly association dues, on which I have fallen behind. The homeowner’s association placed a lien and is threatening foreclosure. What should I do? – Darlene B.

DEAR DARLENE: Your equity is the difference between the market value of your condo and the amount you owe, which is secured by the condo. If there is a recorded judgment or lien against your condo, then your equity is the fair market value minus the amount of that lien.

It would be a shame for you to lose your condo if the homeowner’s association forecloses on its lien for unpaid association dues. I suggest you talk with your banker, credit union or other lender about obtaining a home equity loan to pay off that homeowner’s association dues lien to avoid foreclosure.

HOW TO PYRAMID YOUR WAY TO TAX-DEFERRED WEALTH

DEAR BOB: My friend sold his investment property with a capital gain of $450,000. Then he bought another property for $600,000 in a tax-deferred Internal Revenue Code 1031 exchange. Now he plans to sell that second property for $800,000. Does he ever have to pay the capital gain tax on his $450,000 profit from the first property? – Linda L.

DEAR LINDA: Your smart friend can pyramid his way to real estate wealth by making a continual series of tax-deferred exchanges.

However, if he ever sells his latest investment property acquisition without making another tax-deferred exchange, he will then owe capital gain tax on all his deferred capital gains from prior trades. For more details, please consult your tax adviser.

MOVING INTO YOUR RENTAL HOUSE IS NOT FRAUD

DEAR BOB: You recently had an item about a husband moving into his rental house to convert it to his personal residence. I was told by an IRS agent this is fraud. According to the IRS, a married couple can only have one principal residence. Is this true? – Richard T.

DEAR RICHARD: Yes and no. It is not unusual for a husband to live in one house and the wife lives in another house, such as when they are separated but not divorced.

After the husband lives in that former rental house he owns for at least 24 months as his principal residence, it can be sold and Internal Revenue Code 121 allows up to $250,000 of tax-free capital gains.

However, even if his wife is a co-owner on the title, if she doesn’t also meet the 24-month occupancy test and if they don’t file a joint tax return, she would not be entitled to $250,000 additional capital gain exclusion on that sale. Please consult your tax adviser for details.

ARE INTEREST ONLY MORTGAGES A “GOOD DEAL”?

DEAR BOB: What do you think of an interest only mortgage for rental real estate? – Mason K.

DEAR MASON: Interest only mortgages are especially good for rental properties. The reasons are (1) the full monthly mortgage payment is tax-deductible as interest, and (2) the payment is at the minimum level, thus increasing rental cash flow.

The obvious drawback is the investor isn’t building any equity in the property from mortgage principal reduction. But most investors don’t even consider mortgage reduction (unless they never plan to sell the property). They usually view their profits primarily coming from appreciation in market value of the property.

THE “IN SPOUSE” AND “OUT SPOUSE” HOME SALE TAX BREAK

DEAR BOB: You recently had an item about a couple who divorced in 1984. The ex-wife lived in their house (presumably with their children). The ex-husband lived elsewhere. I think your answer was incorrect because you said, when they sell their house, they can each claim up to $250,000 tax-free profits. But as I read Internal Revenue Code 121, this double tax break is only available to a married couple – Peter L.

DEAR PETER: This is known as the “in spouse” and “out spouse” rule of Internal Revenue Code 121(d)(3)(B) and IRS Regulation 1.121-4(b)(2). As long as the “in spouse” who lives in the principal residence meets the two-out-of-last-five-years ownership and occupancy tests, the “out spouse” who is on the title but doesn’t live in the home can also qualify for up to $250,000 tax-free home sales profits.

There is no time limit. Even if the house is sold 10 or 15 years after the divorce, both ex-spouses can claim their exemptions if the person living in the principal residence meets the ownership and occupancy tests. For details, please consult your tax adviser.

NO LEGAL RIGHT TO A VIEW

DEAR BOB: I bought my home about a year ago because of its panoramic view. However, I recently came home from work and discovered my downhill neighbor building a pitched roof on top of his existing flat roof to divert rain. This will block our beautiful view. When I talked with him and the roofer, I learned it is legal for him to build his roof, which will block my view. What can I do? – Alexis A.

DEAR ALEXIS: Sorry. In the absence of a city view ordinance, there is no legal right to a view. For example, some cities have ordinances requiring homeowners to trim trees to avoid blocking views.

In the absence of such a view protection ordinance, unless you purchase a view easement from your neighbor to protect your view, if he has a building permit for that pitched roof, he can proceed. For more details, please consult a local real estate attorney.

WILL RENTING A CONDO AFFECT ITS MORTGAGE?

DEAR BOB: My girlfriend recently took out a mortgage on her condo in Vermont. But she spends all of her time at my home. We have discussed the possibility of her renting out her condo to pay its mortgage each month. If she rents the condo, will her mortgage interest rate be increased since the condo is no longer owner-occupied? – Augustus B.

DEAR AUGUSTUS: Your girlfriend is free to rent her condo (presuming the condo association doesn’t have any restrictions on rentals). The mortgage lender cannot change the interest rate or other terms just because the condo is no longer owner-occupied.

Of course, to avoid negative cash flow, she should be sure the rent will be enough to pay the condo mortgage, monthly condo fee, and property taxes. If not, perhaps she should sell the condo.

The new Robert Bruss special report, “Consumer Awareness Guide to Living Trust Pros and Cons for Avoiding Probate Costs and Delays,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.