Q–My husband has received a tremendous job promotion. The only bad aspect is it is located in New York City.
We’ve taken two trips there to look at condominiums and cooperative apartments for purchase. The co-ops seem so much less expensive. But the Realtors seem to push the condos.
Is there something wrong with cooperatives?
A–Yes. A cooperative apartment building is owned by a corporation in which all the co-op owners are stockholders with proprietary leases to occupy their apartments. There is usually one master mortgage on the building.
Each co-op owner also often has a bank loan secured by their co-op stock.
In addition to New York City, you will find co-ops in Florida, California, Chicago and a few other areas.
Co-ops have two major drawbacks, compared to condominiums.
One is prospective buyers must be approved by the board of directors which need not give its reasons for rejection.
Perhaps you recall ex-President Nixon’s well-publicized co-op rejection. This buyer approval requirement holds co-op market values down because few buyers want to go through the ordeal.
A second major co-op drawback is financing difficulty. As the master mortgage gets paid down, each co-op owner’s equity grows.
This can make financing a co-op sale far more difficult than for condos, which have individual mortgages, just like single-family houses.
Q–About six years ago we bought our current home. When we did that, we deferred the tax on about $95,000 profit from the sale of my husband’s former home, which was in his name alone (he was a widower when I married him seven years ago).
At our tax advisor’s suggestion, our current home is held in my husband’s name alone. But he has terminal cancer and is expected to live only a few months.
As neither of us is yet 55, when my husband dies will I have to pay tax on that deferred profit? His will leaves everything to me. He wants me to ask you if there is anything which should be done now to minimize taxes.
A–Don’t worry. Death is the ultimate tax shelter.
When your husband dies, leaving the house to you, Uncle Sam will forgive the deferred tax which would become due if your husband sold the house before he dies. You will inherit the house with a new basis stepped-up to market value on the date of your husband’s death.
When your husband sold his old principal residence, the rollover residence replacement rule (Internal Revenue Code 1034) required deferring the profit tax since a replacement home of equal or greater cost was purchased within 24 months before or after the sale.
Now Uncle Sam will forgive that deferred profit tax when your husband dies. Heirs do not have to pay the deferred tax.
Your husband asked if there is anything he should do now to minimize taxes when he dies. Since I am not an estate planning expert, that’s a bit out of my real estate field.
However, I strongly recommend putting title to the home and other major assets, such as bank accounts, stocks and bonds, cars, and other real estate, into a living trust now. This will avoid unnecessary probate costs and delays.
Your family attorney can handle the details.
Q–Recently I attended a property tax collector’s sale where properties were being sold for unpaid real estate taxes.
Before the sale, I got the list and there were several lots with nice homes on them which I came prepared to bid on.
However, at the sale these houses had been removed from the list of properties to be sold. Nobody seemed to know why.
The only properties being sold were vacant “junk” lots so I didn’t bid. Is this typical of sales for unpaid real estate taxes?
A–Yes. Very rarely does a desirable property go to sale for unpaid real estate taxes.
The primary reason is if the property has a mortgage on it, the mortgage lender will pay any unpaid taxes and collect the money from the borrower.
If an attractive property without a mortgage gets on the sale list for unpaid taxes, a bargain-hunter will usually contact the owner and buy the property (at a bargain price), immediately paying the defaulted taxes before the sale.
The result is only the least desirable properties wind up at property tax collector’s sales, such as vacant lots and landlocked parcels.
In many states, tax lien certificate sales are held.
Here you pay the unpaid taxes and receive a tax lien certificate. If the property owner doesn’t pay within a few years, you wind up owning the property.
However, chances are you will only wind up earning an excellent return on your money because most properties are redeemed for their unpaid taxes.
Q–Some time ago you mentioned the “40 thieves” who show up to buy at foreclosure sales. Who are these people?
A–The term “40 thieves” refers to the professional sharks who bid at foreclosure sales.
Each community has its local gang of regular bidders who earn their living buying foreclosures and reselling these properties at higher prices, often after minimal fix-up work.
Having met most of the “40 thieves” in my county, I can say they are primarily decent people.
However, don’t get in their way when one wants to buy a specific property. I’ve been offered as much as $1,000 to not bid on a property and “get lost.” Accepting such a bribe is illegal, of course.
Q–My wife and I have been looking over a year for a home to buy. We’re not highly-motivated buyers because we have a bargain apartment rent.
However, on Sunday afternoons we love to visit Realtor’s open houses. I think we now know more about real estate than 99 percent of the Realtors we meet.
In April we saw a “for sale by owner” sign and stopped in. A young man was selling the house for his elderly mother who was in a convalescent home.
Although the house was badly run-down, the asking price was a steal.
At first I thought it was a mistake, but the owner’s attorney said the price was low for a quick, cash sale to pay the old lady’s bills. My bank funded the mortgage in less than a week.
Since we bought the house at least $50,000 below market value, if the IRS finds out will I owe any tax?
A–No. There is no tax to pay when you buy real estate below its market value.
However, when you eventually sell your new home, Uncle Sam will then be waiting to tax your sale profit.
Of course, at that time you can use the rollover residence replacement tax deferral rule or the “over 55 rule” $125,000 home sale tax exemption to avoid paying profit tax.
Q–I rent my apartment. Once or twice a year the landlord sends all the tenants a little brochure from his insurance agent offering us renter’s insurance. I’ve never bought.
But a few months ago there was a burglary in the building. Fortunately, the tenant had renter’s insurance and almost 100 percent of her loss was paid by the insurer.
Do you think tenants need renter’s insurance?
A–Yes. Renter’s insurance is very inexpensive. But it can pay off handsomely for losses due to theft, liability injury to a guest in your apartment, water or fire damage to your furnishings, and accidents.
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The new Robert Bruss special report “How to Profit from Tax- Deferred Exchanges” is available for $4 from Tribune Media Services, 435 N. Michigan Ave., Chicago, IL 60611.
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, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611.
