Q–My wife and I have just started looking for a home to buy. We’re in no hurry, but hope to buy before June. What irks us is the snoopy real estate agents we meet at the Sunday open houses.
The moment we express the slightest interest in the house, they ask “How much do you have for a down payment?” I reply “As little as possible.” Then the agents ask snoopy questions about how much we earn, how much we now pay for rent, and if we have good credit.
How would you handle these questions?
A–You could avoid this hassle and solve a problem by getting preapproved in writing for a mortgage with a bank, mortgage broker or mortgage banker. Then you can reply to those snoopy real estate agents, “Don’t worry. We’re already preapproved for a mortgage.”
I agree the realty agents seem nosy asking all those questions. But they don’t want to waste their valuable time with flaky buyers who can’t afford to buy the home.
By getting preapproved for a mortgage, you’ll be ready to buy the home you want when you find it. Also, you’ll discover what price range you can afford. Finally, mortgage preapproval will take care of potential problems, such as clearing up credit report errors.
P.S. Be sure the actual lender who will make the mortgage loan writes the preapproval letter. Don’t accept a worthless “prequalification” letter, which means only, “We think you might be able to get a mortgage.”
Q–We recently moved out of our house of 38 years and bought a beautiful condominium penthouse. We decided to keep our house and rent it to tenants.
Do we have to report this status change to Uncle Sam?
A–No. With your 1997 income tax returns, on Schedule E you must report the rental income received from your former personal residence. This is also the place where you can deduct applicable expenses such as mortgage interest, insurance, property taxes, repairs and depreciation.
Your tax adviser can provide full details.
Q–I want to thank you for recommending to another reader early last year that he put all his assets into an “inter vivos” living trust. My mother, who was dying of cancer, read that article. She showed it to me and insisted I have an attorney set up a living trust for her.
We did that. The living trust specified who was to get what when mother died.
When she became unable to manage her four rental properties, as successor trustee I took over. After she passed away in July, I became her successor trustee and distributed her assets as she specified in the living trust.
Although the family attorney guided me, it couldn’t have been easier. No probate. No delay. No complications. No big expenses.
Since then, I’ve talked with friends who said it took them over a year to settle estates. Thank you for recommending a living trust. I’ve got one now and I recommend them to all my friends.
A–Living trusts are the best way to avoid unnecessary probate costs and delays. During the trustor’s lifetime, everything continues as before, with the trustor managing his or her affairs.
But, as you explained, another living trust benefit occurs if the trustor becomes unable to manage affairs. Then the successor trustee, such as a spouse or adult child, takes over.
I’m glad the living trust made your mother’s passing on as easy as possible.
Q–I understand President Clinton is proposing to make home sales tax-free up to $500,000, maybe more. When will this tax law take effect?
I ask because I want to sell my large home but I’m waiting to see when the tax break will become effective.
A–It’s now up to Congress to enact any tax law changes. All President Clinton can do is propose the changes. Much can happen between now and the time a tax bill becomes law, if ever.
Don’t hold your breath waiting for tax law changes. They are at least many months away, since Congress works very slowly. Many tradeoffs occur, so nobody can say whether the home sale tax reductions, if enacted, will be retroactive to Jan. 1, 1997.
My suggestion is to proceed under the current tax laws. If you are 55 or older, the “over 55 rule” gives you up to $125,000 of tax-free profits.
But home sellers who are not eligible for that tax exemption can use the “rollover residence replacement rule” available to everyone. It requires deferring your home sale tax if you buy a replacement of equal or greater cost within 24 months before or after the sale.
If you want to buy a less expensive replacement home and have a sale profit over $125,000, your tax adviser can show you how to avoid tax by combining both of these tax breaks.
Q–Our offer to buy a house was accepted and signed by the sellers. Then we talked about some mutually advantageous changes. Nothing was put in writing and the contract was not changed.
A lawyer is handling the closing. When we went to her office to sign the final papers, they reflected our orally agreed-upon changes. We signed and so did the sellers, but the closing is to be delayed until the sellers complete some repairs.
Now we just learned the sellers think they should be paid more because the repairs are costing them more than expected. Even though we all signed the closing papers, can the sellers back out and go back to the original terms?
A–The general rule is the latest written agreement prevails over a previously signed contract. If the closing papers reflect the orally agreed-upon modifications, they became the latest writing and are presumed to be a valid contract since both parties signed.
Ask your attorney for further details.
Q–I have a friend, a real estate broker, who owns about 12 condo rentals. She claims to break even on the cash flow, but she says the big benefit is the extremely favorable condo depreciation.
Are condos better rental investments than houses?
A–No. Your real estate broker friend is in a special situation because she is in the real estate business. Real estate professionals have no limit to their loss deductions from passive activity rental property, as do most investors.
The only good thing about most condo rentals is the high depreciation deduction. That’s because most of the purchase price is depreciable since the land-to-building ratio is usually very low.
As a real estate broker, your friend can deduct more than the $25,000 maximum annual loss against ordinary income that applies to most investors who are not in the real estate business.
Condominium rentals rarely produce enough income to pay the expenses such as mortgage, property taxes, repairs and condo fees. Also, they usually do not appreciate in market value as rapidly as single-family houses.
Sorry, I do not recommend condo rental investments.
Q–I rent a studio apartment in a modest 20-unit apartment building, which the landlord has let run down badly. The only reason I stay is that the rent is low and I can’t afford to move.
However, the windows leak, the heat is inadequate, the hallway is barely lighted at night, the elevator doesn’t work (I live on the third floor), the hot water is lukewarm, and the front door lock is broken so anyone can enter and burglarize the apartments.
When I moved in about five years ago it was a nice building with an affordable rent. Now I hate to come home from work because I don’t know what problem I’ll encounter. Several tenants, including me, have refused to pay rent until the problems are corrected.
Last week I was served with eviction papers. Can the landlord evict us when the building is in such bad condition?
A–It sounds like your landlord has breached the implied warranty of habitability. In most states, this is an eviction defense.
Please consult a landlord-tenant attorney who can advise on your best specific course of action.
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PLEASE NOTE: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
The new Robert Bruss special report “If You’re Over 55, How to Claim Your $125,000 Home Sale Tax Exemption — Or More” is available for $4 from Robert Bruss, 251 Park Rd., Burlingame, Calif. 94010.
