Q-I am 78 and have 14 income properties which I plan to give to my two children when I die. But they have offered me a fixed monthly income if I will give them the properties now. This is very tempting to me as I don`t enjoy the management. Do you think I should give away my properties now rather than willing them to my children? Incidentally, I just had a checkup and my doctor says I am in excellent health.
A-Please consult your tax adviser before you do anything. Giving your properties away before your death could be a costly mistake for both you and your children. You may be subject to a gift tax, and they would lose the stepped-up market value basis that they will receive if they wait to inherit the properties.
Many people are not aware of the stepped-up basis benefit of inheriting property. To illustrate, suppose you own a property now worth $100,000 that has a $25,000 adjusted cost basis to you. If you give this property away now, your donee will take over your $25,000 basis for it. Since your donee will have a $25,000 basis in this example, if he or she sells the property for its $100,000 market value there will be a $75,000 taxable gain. But if the same person inherits a property that is worth $100,000 when you die, your heir will receive a basis stepped-up to $100,000 and no tax will be due if it then is sold for $100,000.
Q-I own a vacant city lot that is worth about $35,000 in a working class neighborhood. I am debating whether to sell the lot or build a house on it, so please advise what percent of a home`s price should be represented by the land value?
A-The traditional guideline has been that land should represent no more than 25 percent of the property`s total value after a home is constructed. Using this criteria means that you should build a $105,000 home on your lot, thus bringing the property`s total value to $140,000.
In recent years the traditional guideline has been thrown out as land prices have risen and the cost of homes built have dropped in relation to the land cost. In high-priced neighborhoods I have seen land costing as high as 50 percent of the property`s total value. I suggest that you talk with local appraisers and home builders to get their viewpoints on what price home your lot will support.
Q-I know that there is a $125,000 tax exemption for home sellers who are 55 or older. Is there a similar tax break if I sell my apartment building since I do not live in it but am over 55?
A-Sorry, but there is no special tax exemption or deferral for older sellers of property other than their principal residences. But you can avoid tax by making a tax-deferred IRC 1031 exchange of your apartment building for another ”like kind” investment or business property. Please consult your tax adviser for details.
Q-I know that you are a strong advocate of home ownership. But in our town the market values have been stagnant for quite a while. The home builders keep building more houses even though our town`s population isn`t growing. The result is an oversupply of homes, thus keeping home prices from appreciating in market value. Under these circumstances do you think buying a home is still a good idea?
A-Yes. But as you know, I have several criteria for profitable home investing, and they especially apply in stagnant market situations such as yours:
(1) Make as small a cash downpayment as possible and obtain as large a mortgage as you can get, (2) buy a rundown fixer-upper house at a below-market price so you can profitably upgrade it and (3) view homeownership as a forced savings account.
Unless home prices in your town are declining because of major unemployment and mortgage foreclosures, now could be a great time to buy a home while the market is slow and prices are reasonable.
Q-A friend told me she recently gave her home to a charity in return for a monthly payment as long as she lives. She can continue living in her home, too. Does this sound like a good deal?
A-Many colleges, churches and other charitable groups such as the Salvation Army welcome real estate donations in return for lifetime income paid to the donor. The monthly payment depends on the property`s appraised market value and the life expectancy of the donor.
Many charities have lifetime annuity plans, but most prefer cash donations. Only a few accept property donations and allow the donor to retain a life estate in the property. If such an arrangement meets the donor`s needs, it is probably a ”good deal.”
Q-There is an abandoned gas station near our home that would be a perfect location for a small convenience grocery. My barber told me the oil company`s lease expired and the land owner lives out of town, so he probably wants to sell. How should I go about investigating the possibilities for this property before I make a purchase offer?
A-Before you spend time and money investigating the property possibilities it would be wise to tie up the property by obtaining an option to buy it. Without such a purchase option you could be wasting your efforts. As you probably know, buying an abandoned gas station is very risky because of the probability that the soil is contaminated from leaking gasoline tanks. Be sure to consider the costs of cleaning up the property before it is in useable condition.
Q-I am about six years away from retirement and won`t have much retirement income except Social Security and a modest pension. My brother lives in the Seattle area and is encouraging me to buy a rental house there because he says the market is booming. Should I invest in the Seattle area in hopes the property might go up in value by the time I retire? My brother would manage it for me.
A-Real estate booms rarely last more than a year or two. Seattle, Sacramento and a few other areas are doing very well now, but there is no guarantee home prices will continue to rapidly appreciate in those areas. Unless you live in an economically depressed area, you probably will do just as well investing close to home where you can watch your properties. I will not buy more than a 30-minute drive from my home because I want to be familiar with the communities in which I invest. If you decide to invest far from your home, please use only cash you can afford to lose.
Q-My wife and I want to buy a home. The problem is we are both retired, living on Social Security and pensions. But we have almost $100,000 in savings. We found a modest home to buy. But the mortgage company recommended by the Realtor turned us down for the loan. We were told we had inadequate income. When I pointed out we can dip into our savings, if necessary, to make the mortage payments, the loan officer said she couldn`t consider that. Since I am 72 and my wife is 68, I think we were discriminated against because of our ages, don`t you?
A-No. Although it is illegal for mortgage lenders to discriminate on the basis of race, sex, national origin or age, I doubt those were the reasons your loan was ”declined.” Rather, I think it was because of inadequate income.
Most lenders love elderly borrowers because senior citizens rarely default on their mortgages. But the lender would not be doing you a favor if you cannot afford the monthly payments from current income. It is nice to have that $100,000 in savings, but it will not last long if you must dip into it to make mortgage payments.
Q-My husband and I are well over 55, so we qualify for that $125,000
”old folks” tax break you often discuss. But our home sale profit will be at least $200,000. Some time ago you told another over-55 seller he could avoid tax on such a sale by purchasing a replacement home. If we do that, can we buy a home in a less expensive foreign country, such as Mexico, or must it be in the United States?
A-Yes, your replacement home can be in a foreign country.
Here is an example of how you can combine the ”over 55 rule” with the
”rollover residence replacement rule” of Internal Revenue Code 1034, which is available to home sellers of any age:
Suppose your principal residence sells for $275,000 net sales price and you have a $200,000 profit (which means $75,000 is your adjusted cost basis). Subtracting your $125,000 ”over 55 rule” exemption from the $275,000 net or adjusted sales price produces a $150,000 ”revised adjusted sales price.”
If you buy a replacement principal residence costing at least $150,000 in this example within 24 months before or after the sale, you then can defer the tax on the remainder of your sale profit. Please consult your tax adviser for further details.
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Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
