Is $250,000 tax break available to rental house seller?

DEAR BOB: I lived in my property for more than 10 years and have rented it for two years. Now I plan to sell it. Will I owe the government any tax for the equity? – Luz C.

DEAR LUZ: If your property is a single-family house, it sounds like you are eligible for the Internal Revenue Code 121 principal residence sale exemption up to $250,000 (up to $500,000 if you are married, filing jointly and your spouse also meets the occupancy test).

Purchase Bob Bruss reports online.

To qualify for the great IRC 121 exemption, you (or your spouse) must have owned and occupied your principal residence an “aggregate” two of the five years before its sale. Although you have rented the property to tenants for the last two years, you still appear to qualify. You need not occupy your former principal residence at the time of its sale. For full details, please consult your tax adviser.

WITHOUT NAME ON HOME DEED, SPOUSE LOST OUT

DEAR BOB: My wife died about a year ago. Although we had been married 10 years, and I paid the mortgage payments on the house, we neglected to put my name on the deed. She died intestate without any will. I now only have a life estate. She had five children (the youngest is ours). How can I get clear title so I can refinance the 9.5 percent interest rate mortgage? Three of the children are now over 18. What should I do? – Bill H.

DEAR BILL: I presume there was a valid reason the probate court awarded you only a life estate in your deceased wife’s house. After you die, when your life estate terminates, the house will probably go to the children.

Legally, they are called “remaindermen.” To be politically correct, we probably should call them “remainderpersons.”

To put the title to the house in your name so you can refinance now, the children would all have to sign quit claim deeds to you. They probably are not willing to do so. The minor children under 18 would need a court-appointed guardian to represent their interests.

I don’t see any easy way out of your messy situation. Please consult a local real estate attorney to learn if there is any alternative.

Your situation shows why husbands and wives should discuss difficult situations, especially in second marriages. A joint living trust could have prevented your problem. Details are in my new special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” which is 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.

TITLE INSURANCE DOESN’T PROTECT A SUBSEQUENT BUYER

DEAR BOB: I am buying a property from a seller who has not had any title problems. Therefore, I don’t want to buy title insurance. But suppose something is later found that their title insurer should have discovered. Would I, as a subsequent buyer, be able to file a claim on their title insurance policy? If not, could I sue my seller, who would then sue their title insurer for not providing clear title? – Raul S.

DEAR RAUL: Your seller’s title insurance company has no liability to you, a subsequent buyer. An owner’s title insurance policy protects only the insured buyer, plus the buyer’s heirs who inherit the property.

To be very blunt, you would be stupid not to obtain an owner’s title insurance policy at the time you purchase any property. Even if you are acquiring title from a parent, your best friend or a relative, you need an owner’s title insurance policy to be certain you acquired marketable title.

Even the most honest property sellers might not be aware of possible liens on the property they are selling or giving to you. Examples include judgment liens, income tax liens, mechanics’ liens, child support liens (in most states), homeowner association liens and lis pendens (pending title litigation).

NO MINIMUM TIME BEFORE OWNER-OCCUPANCY AFTER TAX-DEFERRED EXCHANGE

DEAR BOB: Fifteen months ago, I completed a tax-deferred Internal Revenue Code 1031 exchange. When I visited my local IRS office, I was informed I could not move into the rental property I acquired for at least two years. I think they are wrong. Is the IRS correct? – Richard N.

DEAR RICHARD: This issue has been raised in this column many times. Every time I consult my contacts at the IRS in Washington, D.C., I am informed there is no minimum time after a tax-deferred exchange before the property owner can move in.

For readers who don’t have a clue what we’re discussing, Internal Revenue Code 1031 says all properties in a “like kind” tax-deferred exchange must be held for investment or use in a trade or business. You presumably traded one rental property for another qualifying rental property. After 15 months, you now want to move into the acquired property to make it your personal residence.

Most CPAs and tax advisers advise you showed the required “investment intent” at the time of your IRC 1031 exchange so you can now move in without any adverse tax consequences. Ask that IRS agent you consulted if there is a new IRS Revenue Ruling or other valid basis for the information you received. I’ll be waiting to hear from you.

WHAT IF HOMEOWNER ASSOCIATION WON’T ENFORCE CC&Rs?

DEAR BOB: I live in a very desirable “upscale” condominium complex, which I enjoy very much. However, the dummies on our homeowner’s association board of directors refuse to enforce our CC&Rs (conditions, covenants and restrictions), which clearly prohibit “recreational vehicles” parked on the premises. My neighbor insists on parking his old dumpy camper in the parking lot (which is supposed to be for visitors). Each condo unit has assigned parking in another area. The association refuses to enforce the CC&Rs to get rid of this camper, which is often parked in the same spot for many weeks. Several other owners are upset, too. What can we do to “light a fire” under our directors to make them enforce our CC&Rs? – Eugene R.

DEAR EUGENE: Have you discussed the situation in a friendly way with at least one member of the board of directors? If you don’t know any of the condo association directors, write a very polite letter to the condo association president requesting enforcement of the CC&Rs to have the offending camper vehicle removed.

Most condo associations are responsive to written letters. To illustrate, as longtime readers know, I own a second-home condo. Each month when I read the minutes of the monthly director’s meeting I note if there was any correspondence and how the board replied. For example, we have an owner who, month after month, is unhappy with the superb laundry facilities. But the board always politely replies to his letters.

Your next recourse is to request your complaint be put on the agenda for the next board of directors meeting. Be sure to attend. During the member comment period, very politely explain why you think the CC&Rs should be enforced to have the offending camper vehicle removed because it detracts from the condo complex desirability.

As a last resort, any owner who is subject to the CC&Rs can file a lawsuit to enforce the CC&Rs. Please consult a local real estate attorney about this alternative.

IS CONDO SPECIAL ASSESSMENT TAX-DEDUCTIBLE?

DEAR BOB: I own a unit in a high-rise condominium. In 2003, the board and co-owners approved a special assessment for needed repairs to all the concrete balconies. I paid my share in 2003. The building manager told me she thinks the special assessment is tax-deductible on my 2003 federal income tax return. Is this true? – Greg P.

DEAR GREG: If the condo is your personal residence, the special assessment is not tax deductible. It is similar to a non-deductible repair cost on a single-family house.

However, if you own a rental condo, because the special assessment was for repairs, then you can deduct it as a repair and maintenance expense on Schedule E where you also report the rental income and deductible expenses. For more details, please consult your tax adviser.

ANY RECOURSE FOR A 1-YEAR-OLD LEAKY ROOF?

DEAR BOB: I bought a home from its seller and was told the new roof was less than 1 year old. But after moving in, I noticed wet spots in the ceiling corners. Do I have any recourse even though the house was sold “as is”? – Jim F.

DEAR JIM: If the wet spots were not visible before the sale, usually evidenced by ceiling water stains, the seller probably didn’t know about the roof leaks.

However, if you can prove the seller knew about the leaks and failed to disclose them, although you bought the house “as is” (meaning the seller won’t pay for any repairs), the seller can be held liable for non-disclosure of known defects.

But the roofer probably provided at least a five-year warranty. Your best recourse is to contact the roofer and ask him to repair the leaks. If he fails to do so, and if he is a licensed roofer, complain to the state agency that issued his roofer’s license.

The new Robert Bruss special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” 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.