Q-You often recommend investing in older rundown houses to fix up for profits by increasing the market value. I agree. However, I am interested in larger properties, such as apartment and commercial buildings. Do you think the same principles apply or should I stick to newer buildings?
A-Yes. The same basic idea of buying low, fixing up for less cost than the increased value, and then either holding or selling applies.
However, most investors are not in a financial position to acquire larger properties, so I recommend starting out with rundown single-family houses. Some people never advance beyond houses. That`s fine. Personally, I am very happy investing in houses because they are so easy to buy, finance, manage and profitably resell.
Apartment and commercial buildings offer greater challenges and opportunities, but also higher risks. If you are not able to complete renovating a large building, perhaps because you run out of funds, you have a very big problem. That`s why I prefer to stay with single-family houses because it is difficult to fail.
Q-We recently bought our first home. But I think we got swindled on the property tax. The seller had paid the property taxes, but we were charged for part of them. Doesn`t this seem unfair for the buyer to be charged for property taxes that the seller paid?
A-No. It is customary to pro-rate the property taxes between the buyer and seller according to the number of days each party owned the property. Although the seller paid the property tax bill, if those taxes included part of the time you own the property, you were correctly pro-rated for your fair share. Be sure to save your closing settlement statement because that is your proof of payment for your property tax deduction on your income tax returns. For further details, please consult your tax adviser.
Q-Thank you for sending your report on lease-options. As a real estate agent I found it very valuable and have already put together two lease-options. However, I have another buyer who wants to buy a home on a lease-option, but she wants the income tax deductions. Your report says the buyer cannot get the ownership tax deductions when a lease-option is used. Is there any way to shift the tax deductions for mortgage interest and propety taxes to the lease-option tenant-buyer?
A-Yes. You are correct it is not possible for the tenant-buyer to claim any tax deductions for a short-term lease-option. However, if you create a long-term lease-option of 30 years or longer, the IRS says this is the equivalent of a property sale and the buyer thereby obtains the tax deductions. The seller treats the transaction as an installment sale.
Please bear in mind the IRS doesn`t care whether the buyer or seller gets the income tax deductions. All that really matters is both parties don`t claim the same tax deductions. Please consult your tax adviser for further details. My special report ”Insider Secrets of Real Estate Lease-Option Profits” is available for $4 from NewspaperBooks, 64 E. Concord St., Orlando, Fla., 32801. Q-Since you write an educational column from which I have benefited many times, as a real estate agent I want to share a horrible experience, so other agents and home sellers won`t make the same mistake.
Last September I sold a vacant house. The buyers were a sweet young couple in their 20s. They were getting a VA mortgage and there was a paperwork hangup getting some verifications. Since the house was vacant, the buyers asked if they could move in, since they were living with relatives and the situation was tense. The sellers agreed. I didn`t know any better, so I didn`t say anything. But after the buyers moved in, they discovered all sorts of problems. The sellers quickly corrected the real problems, such as clogged sewer because the house had been empty almost six months.
But then the wife said there were ”spirits” in the house and she felt they shouldn`t buy. The loan papers were ready in November, but the buyers refused to sign. Right after New Year`s they moved out, one step ahead of the sheriff. All this couple lost was their $100 earnest money deposit. This was an expensive lesson for the sellers and myself. I just thought you should know there are professional scam artists out there.
A-Thank you for sharing that experience. I wouldn`t be surprised if that
”sweet young couple” is working the same scam on another innocent seller and real estate agent. The moral is never, never, never let the buyer move into the house until the sale is recorded.
Q-My husband and I have filed for divorce. We are both in our mid-60s. Our plan is to sell our expensive home and go our separate ways. However, when we sell, we will have a profit larger than the $125,000 ”over 55 rule”
exemption you often discuss. Is there any way I can shelter my half of the sale profit from tax, if I buy a less expensive house or condo?
A-Yes. If you plan carefully you can shelter more than $250,000 of tax-free profits if you wait to sell your home until after your divorce is final. I`ll presume each of you meets the ”over 55 rule” requirements of 1) being 55 or older on the day of sale, 2) having owned and lived in your principal residence at least three of the five years before sale and 3) never having used this tax break before.
To illustrate how to avoid tax, let me pick some numbers. Suppose your home sells for $450,000 net, but you only paid $50,000 for it many years ago, so you have a $400,000 sale profit. Presuming everything will be divided equally, your share of the sale price is $225,000. Subtracting your $125,000
”over 55 rule” exemption reduces your ”revised adjusted (net) sales price” to $100,000. But your half of the $50,000 basis is only $25,000, so you still have a $75,000 potentially taxable remaining profit.
To avoid paying tax on this remaining $75,000 profit, you can use the
”rollover residence replacement rule” of Internal Revenue Code 1034. This tax break is available to homesellers of any age who sell their principal residence and buy a replacement home of equal or greater cost within 24 months before or after the sale. In our example, you would need to buy a replacement principal residence costing at least $100,000, the amount of your revised adjusted (net) sales price.
Incidentally, you can defer your tax on the remaining $75,000 profit even if your ex-husband elects not to buy a replacement home. Of course, he would then have to pay tax on his $75,000 taxable profit. For further details, please consult your tax adviser.
Q-About six years ago, I inherited some land from my late father. I have rented it since then to a farmer who has made me an excellent offer to buy it. If I sell, how do I figure my profit and tax?
A-Your basis for the land is its fair market value on the day of your father`s death. This figure was used on your father`s estate tax return. When you sell for more than this amount, your taxable profit is the difference between your basis and your net sales price after selling costs.
For example, suppose the land was worth $100,000 when your father died and you sell it for $150,000. Your taxable profit is, therefore, $50,000. Your tax adviser can give you further details.
Q-I own a small apartment building where one noisy tenant is causing my other good tenants to threaten to move out. Another problem is this bad tenant is always late paying the rent. How can I get rid of her without going to court?
A-One alternative is next month when your tenant is late with the rent, immediately serve her with a ”Pay Rent or Move Notice.” Depending on state law where the apartment is located, she then has several days to pay the rent or get out. At the time you deliver the notice, you may want to have a friendly conversation in which you offer to help pay her moving costs. If she fails to pay the rent, then she has to get out or be evicted. Since you want her out, don`t accept any partial rent payment.
Another alternative is to give your tenant a 30-day Notice to Move because she is too noisy. Again, offer to help pay her moving expenses. But if she refuses to move, then court eviction is the only way to get her out.
You may not like the idea of paying a troublesome tenant to move, but it is far less expensive than having to evict her or, worse yet, losing your good tenants. For full details, please consult a local real estate attorney.
Q-You often advise to ”consult a local real estate attorney.” But how can I find a good attorney who understands real estate law?
A-One method is to phone your local Board of Realtors for the name of their attorney. This person is usually very knowledgeable on real estate law or can recommend a local real estate attorney.
Another method is to phone one or more nearby community colleges or universities to obtain the name of their real estate law instructor. This person is usually a full-time local real estate attorney and a part-time teacher.
Q-I am trying to sell my home. The realty agent who has my listing suggests, since I own my home free and clear, that I carry back a first mortgage for the buyer. This idea appeals to me since I am retired and could use the extra interest income. She says I can get 10 percent interest in today`s market. But I am concerned the buyer might not make the payments and I would have to foreclose. As I am moving away from the area to be near my daughter, do you think it would be dangerous for me to have a mortgage on my home which will be about 500 miles away?
A-No. Carrying back a seller-financed mortgage on your old home can be your best investment if you handle it correctly. As a buyer of rental houses, I make monthly mortgage payments to my sellers who now live in many different states. I`m sure they pray I will default so they can foreclose, get their old homes back, and resell for a second profit. Of course, I won`t let that happen.
Your first step is to instruct your realty agent to advertise your home with seller financing. For your protection, your buyer should make a cash down payment of at least 15 to 20 percent. But before accepting a purchase offer, be sure to check out the prospective buyer by verifying employment and credit history. The realty agent can assist you.
The next step is to be sure your promissory note and mortgage contain 1)
a late payment penalty, 2) a due on sale clause and 3) a prepayment penalty. These conditions put you in the driver`s seat. Finally, you should let the buyer know you expect to receive your monthly payment by the due date each month. Be sure to phone or write the borrower immediately if the payment is late. Before you leave town, be sure to get the name of a local real estate attorney who, if necessary, can represent you in case a foreclosure becomes necessary. Your realty agent can also assist you. If you plan for the worst, it won`t happen. But if you don`t plan, you are planning to fail. For further details, please consult a local real estate attorney.
Q-I owned a condo which I had listed for sale over six months. Finally, a young couple offered to buy it by taking over my monthly mortgage payments. As I was desperate, I agreed to sell for just the amount of the Realtor`s sales commission as a down payment. The buyers took over my VA mortgage.
Now I have received notice from the VA lender that my mortgage is five months in default. I was warned that I can be held liable for any deficiency loss the lender might suffer on a foreclosure sale. What can I do to protect from being sued by the lender?
A-Unfortunately, there isn`t much you can do since you failed to require the buyer to assume your VA mortgage so you could be released of further liability. By allowing the buyer to purchase your condo ”subject to” the mortgage, you remained liable on it. If the VA lender suffers a foreclosure loss, you can be held liable for that deficiency. Please consult a real estate attorney for further details.
Q-I own a rental house in which I have about $40,000 equity. I would like to use that equity to acquire a more productive property, such as a small apartment building. I heard about making a tax-deferred exchange but have not been able to find any apartment seller who will take my house in trade. Any ideas?
A-A Starker delayed tax-deferred exchange can solve your problem. Internal Revenue Code 1031(a)(3) says you can defer tax by selling your investment or business property, having the sales proceeds held by a third-party intermediary, such as a bank trust department, beyond your constructive receipt, and then using the sales proceeds to acquire a qualifying ”like kind” property, such as an apartment building.
You have 45 days after selling the old property to designate the property to be acquired and 180 days to complete the acquisition. Further details are in my special report ”How the New IRS Regulations Affect Tax-Deferred Exchanges” available for $3.75 from Newspaperbooks, 64 E. Concord Street, Orlando, Fla. 32801.
Q-We have little cash for a home down payment. But our Realtor found a home for sale where the seller will carry back the mortgage with just a $6,000 cash down payment. The problem is she wants us to pay off her mortgage in just two years. Do you think this is feasible?
A-No. A two-year mortgage balloon payment is far too short. Ten years would be much better, but don`t accept less than five.
Q-We sold our home last year and the buyer took over our FHA assumable mortgage. I wrote to the lender for our insurance refund, but have not received any reply. How can I get my insurance money back?
A-Sorry, you can`t. The only time an FHA borrower is entitled to a refund of part of the MMI (mutual mortgage insurance) fee, which the borrower paid, occurs when the FHA loan is paid off in full by that borrower. Since you did not pay off the FHA mortgage, you are not entitled to any refund.
But I must hasten to add, for borrowers who paid off their FHA mortgages in full, but did not obtain refunds of their MMI premiums, they can write to U.S. Department of Housing and Urban Development, Distributive Shares Branch, Room 2239, 451 Seventh St. S.W., Washington, D.C. 20401. The phone is 202-755-5616.
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The new special report ”1991 Realty Tax Tips-12 Chapters of Tax-Saving Ideas” by Robert J. Bruss is available for $4 from NewspaperBooks, 64 E. Concord St., Orlando, Fla., 32801.
