Q–Our Realtor phoned us about a new listing the day the house came on the market for sale. We inspected it immediately and knew it was perfect for us. We promptly made a full-price purchase offer with only a contingency for a professional inspection.
The seller counteroffered at $7,500 above the asking price. Since we offered the full asking price, doesn’t the seller have to sell to us?
A–No. The asking price is an invitation for offers at that amount, not an offer to sell. The seller has no obligation to sell for the full asking price, but I’ll bet the listing agent is mad at that seller for not accepting your offer.
Q–Last January my husband died of a heart attack at our winter home in Arizona. He was only 76, just finished a round of golf, and came home to lie down for his afternoon nap. He died in his sleep.
I’ve decided to sell our Arizona home and move back to our primary residence since our children and grandchildren live nearby. Although I’ve listed the Arizona home for sale, I’m in no hurry to sell.
Since it is in a retirement area of “snowbirds,” my Realtor says the best time for a sale will be next winter. But my question involves the taxes. The house was in my name alone, since my husband’s health was not good when we bought the house. My net sale profit should be about $150,000. How can I avoid paying tax on my profit?
A–You can’t. Unfortunately, second or vacation homes are not eligible for either the “over 55 rule” $125,000 home sale tax exemption or the “rollover residence replacement rule.” These tax breaks apply only to the sale of a principal residence.
Nor can second homes qualify for an Internal Revenue Code 1031 tax-deferred exchange for business and investment properties.
However, if you rent the Arizona home to tenants before selling, thus converting it to trade or business property, then it can qualify for a tax-deferred exchange. IRC 1031 does not say how long a property must be rented after conversion from personal use before it can be exchanged. Most tax advisers suggest at least six to 12 months.
After rental for a reasonable time, your second home can qualify for a “like kind” tax-deferred exchange for investment property near your primary residence. You could trade for a rental house, apartments, offices, stores, warehouses or any investment property except a personal residence.
By using a Starker delayed tax-deferred exchange, a direct trade is not required. After selling the Arizona rental house, you would have 45 days to designate the “like kind” property to be acquired and 180 days to complete the acquisition. Meanwhile, the sales proceeds must be held by a third-party intermediary such as a bank trust department.
But Congress is discussing changes in the tax-deferred exchange rules to limit trades to “same kind” property, so watch for changes in this tax law.
I’m sending you my special report “How to Profit from Starker Tax-Deferred Exchanges.” Readers may obtain a copy by sending $4 to Robert Bruss, 251 Park Rd., Burlingame, Calif. 94010.
Q–You often say, “for more information consult your real estate attorney or tax adviser.” But you never say how to find a good one. Any suggestions?
A–Finding a good real estate attorney usually isn’t too difficult. Personal recommendations are best, of course. A good method is to phone the local Association of Realtors to ask for the name of their attorney. He or she is usually very knowledgeable in real estate law. If that person is too busy, ask for recommendations of other excellent real estate attorneys in the community.
But finding a tax adviser who understands real estate taxation is not as easy. If there is an apartment owner’s association in your area, they usually have a tax adviser who writes for their newsletter and is very knowledgeable on realty taxation. Similarly, if your area has a real estate investor’s club, they probably have tax adviser members who understand real estate taxation.
A phone call to these organizations should produce names of knowledgeable realty tax advisers.
Q–I own a rental house, which I rented to a single man. Until recently, he always paid his rent on time. Now he is 10 to 15 days late each month. Recently he has been disturbing the neighbors, who have phoned me about the late night noise from his parties. I’ve asked him to keep the noise down but that hasn’t helped. He is on a month-to-month rental agreement. Should I evict him?
A–You must decide if you want the tenant to leave, since your talk with him hasn’t produced results. If you decide he should leave, avoid eviction, which can be very expensive for you.
Try to get the tenant to agree to vacate by a definite date. If he won’t agree, then giving him a written notice to move starts the procedure.
This notice to move may cause him to stop paying rent, thus forcing you to evict. Eviction usually takes 30 to 60 days, thus resulting in “free rent” before the court renders judgment and the sheriff removes the tenant. By then, your tenant and his friends may have caused considerable damage.
To avoid eviction, I suggest you offer the tenant “moving money.” Explain to the tenant how much an eviction will cost in legal fees and say “I’d rather pay you the money if you’ll move out quickly.”
Paying $500 to $1,000 to the tenant is usually sufficient. But don’t deliver the money until the tenant has moved out and you have inspected for damage. A local attorney specializing in evictions can give you full details.
Q–I own a rental house in Florida where I plan to retire someday. It has been rented to the same tenant for the last six years, but she recently notified me she’s moving out.
I contacted a nearby Realtor’s office and he wants a rental fee of 5 percent of a year’s rent to find me a new tenant. He charges extra for supervising cleanup and painting. If he collects the monthly rent, his “management fee” is 10 percent of the gross rental income. Do these fees seem high to you?
A–No. Those property management fees for renting and managing a single-family house seem quite reasonable if the Realtor gets your house rented quickly. Losing one or two months’ rent will be far more expensive.
Q–I own a small apartment building with a mortgage at 11.5 percent interest. I can refinance to lower my interest, but my problem is that the existing mortgage has a big prepayment penalty. I asked the current lender to refinance, but that lender no longer makes apartment loans. If I stop making the mortgage payments, forcing the lender to foreclose, can I avoid the prepayment penalty?
A–Stopping the mortgage payments is a sure way to begin foreclosure. However, it will also ruin your credit, thus killing your chances of refinancing with another mortgage lender.
If you explain to the new lender what you plan to do, and don’t mind harming your credit, be sure to get their written loan commitment and promise to make the loan even if you are in default on your current loan. I will be very surprised if the new lender agrees to such a plan.
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.
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Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
