Q–My daughter and son-in-law built a home for $250,000. Two years ago my son-in-law died suddenly. My daughter can no longer afford the home, so she’s selling it for $300,000 and building a smaller home for $150,000. She intends to put all her profit from the home sale into the home purchase.
She has talked to several CPAs about all this. Half say she’ll owe capital gains tax on her $50,000 profit; the others say she won’t. Who’s right?
A–This situation is not as simple as it seems. The first issue is: What is your daughter’s adjusted cost basis in the home she’s selling? I’ll presume the house is located in a non-community property state (since your letter came from Missouri) and your daughter inherited her husband’s half of the house.
Your daughter’s basis is therefore her original $125,000 basis, plus the value of the half inherited from her husband two years ago. If the house was worth $300,000 two years ago, her basis for the inherited half is $150,000, for a total of $275,000. Presuming $300,000 is the net sales price, after paying sales expenses, the taxable sale profit is only $25,000.
Since your daughter is buying a much less expensive replacement home, she will owe tax on her $25,000 sale profit. The fact that she is putting all her sale profit into the less expensive replacement home is irrelevant. She should consult a competent tax adviser to be sure she doesn’t pay any unnecessary home sale tax.
Q–A five-acre parcel of vacant land is owned by five heirs, four of whom want to sell. But one heir cannot be located. Is publication of the intended sale in the local newspaper considered legally sufficient notice to all parties who may have a legal interest?
A–No. The four heirs who want to sell should bring a partition lawsuit in court. The missing heir can be served by publication in a local newspaper. The judge can then order the property sold. The missing heir’s partition proceeds can be held in trust. You’ll need a local real estate attorney to handle the details.
Q–My wife and I are in the process of buying our first home. We are making a small down payment and, with the mortgage lender’s permission, taking over payments on the existing mortgage. One of the closing costs that was itemized for us is title insurance, which will cost just over $400.
Since the sellers bought the house about two years ago and obtained title insurance then, our Realtor thinks we can forget the title insurance and save $400. She has been selling homes over 10 years and has never heard of any title insurance claims. Do you agree?
A — No. Your Realtor gave you very bad advice. Every property buyer should insist on obtaining an owner’s title insurance policy. I would never buy any property without an owner’s title insurance policy.
The fact that your sellers obtained title insurance two years ago is irrelevant. Many title problems could have arisen since then. Or perhaps the previous title insurer didn’t catch a title flaw. For example, a forged signature (the most common cause of title losses) in the chain of title could cost you your home when the forgery is discovered.
If the sellers had any mechanics’ liens, judgment liens, income tax liens or other liens recorded against them while they owned the house, you would be obligated to pay those liens or risk losing your home. The possibilities are endless. For a mere $400, you can remove the worry of any such risks appearing.
The reason your Realtor has never heard of any title insurance claims is because they rarely occur. Title insurers pay out for claims less than 10 percent of their premiums collected. They spend most of their income researching titles before insuring them.
If a title insurer discovers a title risk that can’t be cured, an owner’s title insurance policy won’t be issued. Once such a policy is issued, it protects as long as you or your heirs own the home.
Q–In late 1995, we bought a home “subject to” its existing mortgage which is held by a bank. When we received the lender’s IRS 1098 mortgage interest statement for 1996, it had our seller’s name and Social Security number on it.
Does this mean we cannot deduct the mortgage interest we paid in 1996?
A–No. Since the mortgage is secured by your home, although the loan is not in your name, you must make the payments or lose the property by foreclosure. This is sufficient to entitle you to the mortgage interest deduction.
The same rule applies to homeowners who are buying under a land contract for deed — also called a contract of sale, agreement for sale, installment land contract and a zillion other names — where the homeowner is the “equitable owner” but not yet the “legal owner.” For further details, please consult your tax adviser.
P.S. You would not be entitled to the mortgage interest deduction if you were not required to pay the mortgage. For example, if you pay the mortgage payments for your elderly mother on her house, you cannot deduct the interest because you have no obligation to make her payments.
Q–I own 50 percent of a rental house I bought with a friend in 1990 for $130,000. Today, it is worth about $110,000. It needs cosmetic improvements. I own and live in a smaller house across the street, which I bought in a down market for only $56,000. It is worth about $110,000 today.
I am considering selling my house and moving into the rental house to improve it before selling it, probably in 1999. Will repairs and depreciation still be deductible on the rental house after I move in? Can I rollover my profit from the sale of my residence into the house across the street?
A–No and no. The rollover residence replacement rule of Internal Revenue Code 1034 requires tax deferral when you sell your principal residence and buy a replacement principal residence of equal or greater cost within 24 months before or after the sale.
Selling your current residence and moving into your already-owned rental house across the street clearly won’t qualify for tax deferral. Once you move into that house, of course, the repairs and depreciation become nondeductible. Please ask your tax adviser to explain further.
Q–In 1992, I signed a quit claim deed to my wife. The mortgage was in her name only since she bought the house before our marriage. She did not record the quit claim deed. I forgot about it.
In February 1994, we refinanced our house and added a home equity loan. I co-signed, since I was still on the title. In March 1994 my wife filed for divorce. Within a few weeks, she recorded my 1992 quit claim deed. The divorce was final in late 1994. I have asked my ex-wife several times since our divorce to refinance (without my signature), since our mortgage greatly limits my credit; I no longer live in the house, nor do I make the payments.
Was that quit claim deed valid, considering the elapsed time between when I signed and when it was recorded?
A–Nice try. But the quit claim deed became valid the moment you signed it and gave it to your ex-wife. The fact that it wasn’t recorded promptly did not invalidate it. (Only a few states require prompt recording.)
Your mortgage obligation situation arises frequently. Unfortunately, there isn’t anything you can do to force your ex-wife or the mortgage lender to take your name off the mortgage obligation. Although you no longer co-own the house, you are still obligated on its mortgage. If she defaults, it will reflect adversely on your credit. Please consult your attorney for further details.
Q–You have said that real estate agents must present all written purchase offers to their sellers, no matter how ridiculous they might seem, because the agent has a fiduciary duty to disclose all material facts to the client.
That’s all well and good. But how can a home buyer who makes a purchase offer be sure the offer was actually delivered to the seller? If the prospective buyer determines the offer was not presented to the seller, what is the recourse?
A–You ask a very difficult question. When the buyer has a buyer’s agent, that buyer’s agent will insist on being present when the buyer’s offer is delivered to the seller. If the seller’s agent also obtains the buyer’s offer, called a dual agency, there would be no reason for that agent not to present the offer to the seller.
When a buyer has any doubt about his offer being presented to the seller, a phone call to the seller’s agent or the seller should clarify if the offer was presented.
As for recourse against an agent who fails to present a buyer’s offer, breach of fiduciary duty is very serious and is grounds for revocation of the agent’s real estate license by the state real estate commissioner. For further details, please consult your attorney.
Q–About four years ago, the neighbor next door to the house we’re buying installed a wrought-iron fence, which was bolted to our house without permission from the current owner (our seller). There is now only one gate, which is kept locked, and one key, which the neighbor holds.
This severely limits our access to our side yard. Can we remove the fence the neighbor installed on our property? Can we detach it from our house? Or should the current owner, an elderly family member, remove the fence since she’s anxious to do what’s right for both of us?
A–A friendly talk with your new neighbor should be the first step. Perhaps there was a neighbor’s agreement that led to the fence being installed on the property you’re buying.
If that conversation doesn’t lead to a mutually satisfactory solution to the problem, your seller could remove the offending fence from her property before she conveys the house to you. Or you can remove the fence from your land after you take title.
Since the fence is on your new property, and the neighbor has not yet established any prescriptive rights, it is in your best interests to remove the fence as soon as possible if a friendly agreement cannot be reached.
However, before taking any action, please be certain of the exact boundary location so you don’t trespass on the neighbor’s lot. For further information, please consult a local real estate attorney.
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PLEASE NOTE: Real estate laws vary from place to place. You should check the laws of your state, county and municipality before making decisions on real estate issues.
Write to Robert Bruss at 251 Park Road, Burlingame, Calif. 94010.
