Q-Almost three years ago, I took a new job that involved a move. Although my new employer refused to help with relocation costs, the increased pay and benefits made the job change and move worthwhile. My problem is that my condo in my former city of Boston hasn`t sold. I bought it real cheap and will have almost a $50,000 profit when it eventually sells. It has been rented for the last two years because I needed the rental income.
My tenant is my sister, who has no interest in buying because she is a student with two years remaining in college. I have had the condo listed for the full three years with an excellent Boston real estate broker, but he tells me the market for condos there is very slow. He writes me once a month to tell me of recent condo sales and they seem to have bottomed out in price.
This summer I will reduce my price $5,000 to help the sale. My question is, when my condo sells can I defer the profit tax, since I bought a more expensive replacement home last year?
A-As you probably know, the rollover residence replacement rule of Internal Revenue Code 1034 allows you to defer your profit tax if you sell your principal residence and buy a replacement home of equal or greater cost within 24 months before or after the sale.
Because you moved out of your home three years ago and rented it for the last two years, the IRS might argue that you converted it into rental property. Such property is eligible for a tax-deferred exchange under IRC 1031, but you might not want to acquire more rental property to defer your profit tax.
But there is hope. The tax law on delayed residence sales due to local market conditions is unsettled. The tax court cases go both ways. For example, the Clapham decision (63 T.C. 505) allowed tax deferral when the home seller took three years to sell his former residence due to poor mortgage finance conditions. In the meantime, he rented the home to tenants. Because you kept your former residence listed for sale while you rented it to pay the mortgage, you may be able to qualify for the IRC 1034 rollover residence replacement rule tax deferral. Please consult your tax adviser for more details.
Title insurance
Q-My uncle owned a vacation home, which I bought from him last year. He gave me a notarized quit claim deed, which was prepared by a country lawyer. I recorded it. Recently my uncle died and his son is claiming the vacation home. I showed him a copy of the quit claim deed, but he didn`t seem satisfied. Do you think I need title insurance and how can I buy it?
A-Yes, you should always obtain owner`s title insurance on any property you acquire, especially when it`s from a relative. For example, your uncle might have unpaid income tax or judgment liens that still apply to the vacation home.
Title insurance is your best evidence of owning marketable title. It is available in every state except Iowa. Just look in the phone book Yellow Pages, under insurance or title insurance, for names of title firms that can insure your quit claim deed. Another alternative is to consult a real estate attorney, who can arrange title insurance for you.
Brother`s keeper?
Q-We are obtaining a mortgage from a small local bank. The vice president very strongly suggested we buy our fire insurance policy from his brother, who operates an insurance agency in the same building as the bank.
We consulted this agent and were not impressed, because the insurance company he recommends is out of state and we have never heard of it. Our auto insurance is with State Farm and our State Farm agent quoted us a lower rate for homeowner insurance. We have always been pleased with our agent`s claim service and want to buy our fire insurance from him. Do we have to buy from the agent recommended by the bank?
A-No. Mortgage lenders can only designate the insurance company rating required, but they cannot specify which agent or insurance company must insure your home.
State Farm is one of the highest rated insurance companies, so your lender must accept a fire insurance policy from this insurer. You can`t blame the loan officer for trying to help out his brother, but you are wise to stick with your agent who gives good claim service.
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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.
