Q-About 10 years ago we moved away from Missouri, but we kept our home there because my sister and her family rented it from us and we thought we might like to move back someday.
Unfortunately, in the recent flood the house was seriously damaged. It may be a total loss. We didn’t have flood insurance.
Also, we foolishly owned it free and clear, so no mortgage is involved and the loss is 100 percent ours. Before the flood our house was worth at least $125,000. Today, it is worthless.
Unless the government builds a levee to prevent future flooding, because of the risk I doubt anyone would even want to buy the two-acre lot to rebuild. Can we claim a $125,000 loss on our income tax returns?
A-You qualify for a casualty loss tax deduction. Since your rental or business property was destroyed and there will be no insurance recovery, you may have a 100 percent deductible loss if you can prove there is no land value.
However, virtually all land has some value. I suggest you post a for sale sign, take photos and wait to see what happens. For example, if you sell the property for $1,000 then you have established its fair market value after the flood.
But your casualty loss is limited to your adjusted cost basis in the destroyed property, not its market value before the loss (unless that was your cost basis).
To illustrate, suppose you bought that house for $50,000 years ago and it appreciated to $125,000 before the flood. Your casualty loss would be limited to the $50,000 adjusted cost basis, less whatever you can get for the property. Another measure of casualty losses is the cost of repairs if your property can be repaired.
However, if the destroyed property had been your residence at the time of loss, then your casualty loss deduction would be calculated the same way, but subject to subtractions of $100 per event and 10 percent of your adjusted gross income. Please consult your tax adviser for details.
Q-I contracted AIDS from a blood transfusion about eight years ago. So far, I’m doing fine, but I never know when I’ll pass on.
I have two wonderful children, ages 14 and 12. My husband died in an auto accident three years ago. Fortunately, he left us well off financially with life insurance.
About a year before he died, we got a mail solicitation for mortgage insurance and he signed up for just a few hundred dollars. As a result of that mortgage insurance, it paid off our home loan.
Although I hope to live many years until a cure for AIDS is found, I have made arrangements for my sister and brother-in-law to take care of the kids if I die sooner. But I was thinking it might be a good idea to deed the house to my children now so they can be sure of getting it when I die.
I wouldn’t want the expenses of my last illness to force a sale of the house. Should I give it to them now?
A-I hope you will live a long and fulfilling life. But you are to be commended for planning ahead for the probabilities.
Please consult an estate planning attorney. Although minor children can receive title to real estate, they can’t convey it. If you deed your house to your children, and you later decide to sell it, then you would have to get a court-appointed guardian to represent their best interests.
Rather than deeding the house to your minor children now, there are other alternatives to consider, such as a living trust, which lets you retain control of the home but assures your children will receive it at the appropriate time.
A living trust also avoids a conservatorship for you if you become unable to manage your affairs.
Q-My wife and I are just starting to look for a home to buy. When we find one we like, how can we be sure we can obtain a mortgage for 80 percent of the sales price?
A-Before shopping for a home, be sure to get pre-approval for a mortgage with a bank, S&L or mortgage broker. Then you can shop for a home with confidence that, subject to appraisal of the home, you will be able to finance your purchase.
But be sure your purchase offer contains a contingency clause for the mortgage you’ll need. If for any reason the pre-approved mortgage cannot be obtained, perhaps because the house doesn’t appraise for the price you offered, then you don’t have to complete the purchase and can obtain a refund of your earnest money deposit.
Q-We have lived in our condo for about five years. Now we are in the process of buying a house. The sale should close in about three weeks.
We consulted several Realtors about selling our condo and they advise us the market is slow for condos now. So we decided to rent it. We found a tenant who will pay us enough to cover the mortgage payment, property taxes and monthly assessment fee.
I was wondering how this rental will affect our income taxes. I know we must report the rent income, but can we deduct any expenses?
A-Yes, you can deduct mortgage interest, property taxes, the monthly condo assessment fee, repairs, depreciation, insurance and any other applicable expenses. Report the rental income and expenses on Schedule E of your federal income tax returns.
A unique tax break for condo landlords is the depreciation deduction for the condo. Although land value is not depreciable, it usually represents a very small percentage of the condo’s purchase price.
For example, suppose you paid $100,000 for the condo. If it is a large complex, your share of the land value is probably very small. It is not unusual for condo landlords to depreciate 95 percent of their purchase price, or $95,000 in this example. Check with your tax adviser for full 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. Letters should be addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
