Q-With the help of a mortgage, we brought a brand-new home last September. As we were walking around the empty house, my wife noticed that an outside wall in the dining room seemed slightly discolored. The builder said it probably was because the house had been closed up for several weeks. He had that wall repainted for us.
After we moved in, we noticed that wall still seemed damp. Several months later, we discovered the wall-to-wall carpet was very wet. I pulled up the carpet and found mildew on the plywood floor. The Sheetrock wall was damp, and we noticed the ceiling seemed to be sagging slightly in the same vicinity. Since there are no water pipes in that wall, I had the roof checked by a roofer friend. He said water could be leaking virtually anyplace on the roof and traveling down the wall.
When we confronted the builder, he said that is impossible. But he had no other explanation.
Now our dining room stinks from the mildew, the carpet is ruined, and the builder refuses to replace the roof. I recall the lender inspected the house, but they refuse to help us. I hear the builder is on the edge of filing bankruptcy. How can we get the mortgage company to pay for a new roof?
A-You can’t. Mortgage lenders usually inspect new houses before approving the buyer’s mortgage loan. But that inspection is no guarantee of quality. Lenders have no responsibility to home buyers if the home proves to be defective.
However, the home builder and any third-party warranty company do have liability to new home buyers. If your home builder refuses to repair or replace the leaking roof, then your claim should be against the third-party warranty company if you received a 10-year warranty policy at the time of home purchase. Such a warranty means far more than the builder’s promise to fix any problems.
Q-We agreed to sell our acreage to a shopping center developer and carry back a mortgage, which we will subordinate to a new construction loan from a bank.
While the developer was getting various government approvals, we learned he assigned our purchase contract to another local developer who has a very bad reputation. Do we have to sell to this second developer?
A-The general rule is a contract is assignable unless (1) prohibited by its terms or (2) it is a personal service contract. Even if your contract did not prohibit assignment, since you agreed to carry back a mortgage for the buyer and subordinate it to a new construction loan, it is a personal service contract.
That means you agreed to finance the sale based on the buyer’s financial ability to make the mortgage payments to you. When the first developer assigned the contract to the second developer, who you don’t like, that means you do not have to agree to the assignment. However, if it had been an all-cash sale with no personal service element, unless the contract prohibited assignment you would have to accept the second buyer. Please consult your attorney for full details.
Q-We bought our first home in 1994. Please tell us which closing costs are tax deductible on our income-tax returns.
A-It would have been helpful if you had included a list of the closing costs you paid at the time of your home purchase. Since it’s difficult to list every possible deduction for home buyers, I’ll generalize.
The biggest tax deduction for most home buyers is the loan fee they paid to obtain an acquisition mortgage for their principal residence. In a recent ruling, the IRS says even if the seller paid the loan fee the buyer can deduct it in the year of home purchase.
Other major tax deductions incurred at the time of home purchase are pro-rated property taxes and mortgage interest. Your closing statement itemized your share of these expenses which may have been paid by the home seller. However, your share is tax deductible.
But most other closing costs are not tax deductible and should be added to your home’s adjusted cost basis. Non-deductible examples include title fee, recording and notary fees, escrow and attorney fees, appraisal fee, and inspection fee. But the fire insurance premium is neither tax deductible nor an addition to your home’s adjusted cost basis. Please consult your tax advisor for full details.
Q-When we bought our new condominium about four years ago we paid for the title insurance. Now we are selling the condo. On our list of closing costs is a title insurance fee. When I questioned it, the real estate agent said it is customary for the seller to pay for title insurance.
If this is true, why did we have to pay the title insurance when we bought the condo?
A-Everything is negotiable, including whether the buyer or seller pays for title insurance. It appears when you bought your new condo, the developer stuck you with the title insurance fee. He probably figured you didn’t know this item is negotiable.
In most counties there is a local custom as to whether the property buyer or seller pays for title insurance. For example, in the county where I live it is customary for the buyer to pay. But in the adjoining county to the south, the custom is for the seller to pay. However, this is not a law so the buyer and seller are free to negotiate as to who should buy the title insurance.
It is not worth losing your condo sale over whether you or the buyer should pay for the title insurance. Please re-read your sales contract. If it does not obligate you to buy the buyer’s title insurance, you shouldn’t have to pay.
Q-Almost a year ago we sold our home for all cash. Now we are ready to buy a replacement home so we can avoid paying tax on our profit. We netted about $92,000 cash from the sale after paying off the mortgage and other expenses. Do we have to reinvest all this money in the down payment of our new home?
I ask because the house we are considering buying needs new landscaping and kitchen remodeling. We would like to use some of that $92,000 for such work.
A-The “rollover residence replacement rule” of Internal Revenue Code 1034 says nothing about how much cash must be reinvested in your replacement principal residence. To defer your profit tax, all that matters is you buy a replacement residence of equal or greater cost within 24 months before or after your home sale.
That means you can sell your home for cash, as you did, and buy a replacement home of equal or greater cost for any down payment you wish, even zero if you qualify for a VA home loan. Please consult your tax adviser for full details.
Q-Because of a job promotion, we are being transferred to the St. Paul-Minneapolis area. However, we know very little about where to buy a home there. On several house-hunting trips we have become thoroughly confused about which area is best for buying a home. With three children, renting an apartment is out of the question. My husband’s job involves considerable travel but, with the excellent freeways there, the neighborhoods we are considering are within one-half hour of the airport and his office. Any suggestions?
A-The two most important facts home buyers in any community should consider, especially in an area with which you are not familiar, are school quality and the crime rates. The best real estate brokers have this information easily available in their offices and can show you homes meeting your needs.
Rarely will you find home values appreciating much in areas which lack good public schools and which have a high crime rate. Home buying shouldn’t be rushed. Take your time. Renting a house for a year can be smart. Better yet, a lease-option is especially advantageous for out-of-towners so you don’t make a costly mistake.
Since I am very familiar with the St. Paul-Minneapolis area as I grew up and still reside there part-time, I would not even consider buying a home in either beautiful city because of their low-quality public schools and the high crime rates. However, most of the suburbs offer excellent public schools and low crime rates.
My personal favorite is the suburb of Edina, which offers a wide range of homes from $60,000 to over $4 million with the best public schools, extremely low crime rate and very friendly people like me.
Q-A friend told me she read in your column that home fix-up costs are tax deductible. As I plan to renovate my house this year, please clarify because my H&R Block tax adviser says home fix-up costs are not tax deductible.
A-Your tax adviser is correct; your friend is mistaken. Home fix-up costs are never tax deductible.
Perhaps she was talking about home sale fix-up costs incurred within 90 days before a home sale and paid for within 30 days after the sales closes. Such expenses can be subtracted from the home’s gross sales price to arrive at its adjusted sales price.
However, the only time such costs of preparing the home for sale, such as painting, repairing and cleaning, save any income taxes occurs if the seller buys a less expensive replacement residence. When buying a more expensive replacement home, your profit tax is fully deferred. Please ask your tax adviser for full details.
Q-Our home was listed for sale almost six months. Finally, in January, another agent brought us a purchase offer that was about $20,000 below our asking price. We tried to negotiate, but the buyer wouldn’t meet our counteroffer so our listing agent recommended selling at the buyer’s original offer price, which we reluctantly did. The sale closed in early February.
Last week I met a friend at the supermarket who asked me why we didn’t reply to her purchase offer. It turns out our realty agent never told us about it because she thought it was too low. However, it was $4,500 higher than the low offer we accepted. Shouldn’t we have been told about my friend’s offer?
A-Yes. A real estate agent has a fiduciary duty to present all offers to property sellers, no matter how ridiculous the offer might seem. Your situation is a classic example of why all offers must be presented, unless the seller has instructed the listing agent not to do so. You may want to report the matter to your state real estate commissioner for disciplinary action against the listing agent.
Q-When my father died a few years ago, my mother received a life estate in the family house. After she dies, I am to receive the house. The problem is my mother is letting the house run down. She has plenty of money in a trust fund to pay for repairs. But she says she needs to save that money “for a rainy day.”
As far as the house is concerned, it already is a rainy day because the roof leaks badly. As she is 93, I don’t know why she wants to save the money. I’m afraid the ceiling will collapse on her from water dripping on the insulation. Is there anything I can do to force my mother to maintain this free-and-clear house which will someday be mine?
A-A life tenant has a legal duty to maintain the life estate property. It appears your mother is committing waste. That is a legal basis to terminate the life estate. I realize you probably do not want to terminate the life estate, but it appears you, as the remainderman, have legal grounds to do so.
Your mother appears to be senile, since rational people who have adequate funds will keep their home in good repair. If you don’t want to terminate the life estate, another alternative is to have the court appoint a conservator of your mother’s assets. The conservator can then invade the trust for the funds needed to repair the roof. Please consult an attorney to discuss your legal choices.
———-
Robert Bruss’ report “1995 Realty Tax Tips: 12 Chapters of Tax Saving Ideas for Realty Owners” is available for $4 from Tribune Media Services, 435 N. Michigan Ave., Room 1408, Chicago, Ill. 60611. Allow six to eight weeks for delivery.
Please note: Real estate laws differ from place to place, so you should check local laws before making decisions. Letters should be addressed to Tribune Media Services, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611.
