DEAR BOB: Years ago, when my wife and I divorced, I agreed she could have a life estate in my house in upstate New York. She lived there until September 2005 when she had to be moved to an Alzheimer’s care home. Her condition is such that she will never be able to live alone again. I want to sell the house. But her nasty daughter, from a prior marriage, claims I can’t sell the house as long as her mother is alive. The daughter has now moved into my house. Her mother, age 72, could live many more years in the Alzheimer’s care home. I talked with an attorney representing the largest title insurance company in the area. He said his company, because of the circumstances, wouldn’t insure the title for a buyer. What can I do? –Herman R.
DEAR HERMAN: Your situation is another classic example why I do not recommend life estates. At the time, you and your ex-wife thought you were doing the fair thing. But now look at the mess, with no end in sight.
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The wording of the life estate should have specified it terminates when the life tenant dies or moves out for longer than six months. Because that wasn’t done, the life tenant’s daughter feels the life estate should continue while her mother is still alive.
The legal solution is to bring a quiet-title lawsuit against the life tenant, your ex-wife. Her daughter might seek to intervene in the case. After the evidence is presented, then it will be up to the judge to rule if the life estate is terminated or if it lasts until your ex-wife passes on.
WITHOUT A TAX-DEFERRED EXCHANGE, PROFIT TAX IS OWED
DEAR BOB: In November 2005 I sold a rental house and used the sales proceeds to pay down the mortgage on an apartment building I own. When my 2005 income taxes were prepared, I argued with my tax preparer this is the equivalent of making a tax-deferred exchange. She said it isn’t and refused to complete my tax returns until I reluctantly agreed to pay the capital gains tax for the sale of the rental house. Don’t you think my paying down the mortgage balance was a tax-deferred exchange? –Ron H.
DEAR RON: No. What you did clearly was not a tax-deferred exchange. Internal Revenue Code 1031 requires the sale of a property held for investment or use in a trade or business and the use of the sales proceeds to acquire another “like kind” such property of equal or greater cost and equity without your having “constructive receipt” of the funds.
Your property sale followed by paying down the mortgage on an already owned property doesn’t qualify as a tax-deferred exchange. Your tax adviser is correct.
NO TAX DEDUCTION UNLESS YOU ARE THE PROPERTY OWNER
DEAR BOB: Last August my mother bought me a two-bedroom condo near where I attend college. I rent one bedroom to a friend. The condo is in my mother’s name but I have a job that, along with my roommate’s rent, pays the mortgage, property tax and condo fee. However, when I filed my 2005 income tax, I couldn’t prove to my tax preparer that I made the payments because I pay rent to my mother and she pays the expenses. The tax preparer says I must be on the title to claim the interest and property tax deductions. Is this true? As a result, I had to pay income tax on my meager job earnings, which would have been sheltered by the mortgage interest and property tax deductions –Jordan W.
DEAR JORDAN: Your tax preparer is correct. Because your name is not on the title to the condo, you have no legal obligation to make the mortgage and property tax payments, so you are not entitled to those itemized income tax deductions.
This problem can be solved if your mother will add your name to her condo title. However, that might have an adverse effect on her tax situation if she loses the tax benefits of owning rental property. She should consult her tax adviser before adding your name to the title.
The new Robert Bruss special report, “Pros and Cons of Today’s Five Best Real Estate Profit Opportunities,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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