Q–On Sept. 1, we closed the purchase of our brand-new home. We obtained a Countrywide mortgage and a title policy from First American Title Insurance. On Oct. 10, we received a mechanics’ lien notice for “labor, services, material, machinery and fixtures.” The claimant was hired by our home builder. What action should we take? Do we need a lawyer? The title company says they will resolve the matter. Can I trust them to take care of this lien, since we don’t want to lose our new home?
A–Your situation is a classic example of why every property purchaser should insist on an owner’s title insurance policy. One of the major title insurance coverages is for mechanics’ lien risks, such as the one you describe.
Your home builder apparently didn’t pay a subcontractor or material supplier, who is entitled to record a mechanics’ lien against your home on which work, services or materials were provided. Usually, recording the mechanics’ lien is sufficient to motivate payment or settlement of the dispute.
However, if the property owner doesn’t pay or settle, the mechanics’ lien claimant can foreclose and acquire title to your home. But that rarely happens. Since you have title insurance, which your mortgage lender required, the title insurance company is liable to settle or pay the mechanics’ lien so you won’t lose your home and the lender’s mortgage won’t be eliminated if the claimant forecloses.
My suggestion is to write a polite letter to your title insurer, asking to be kept informed of the details resolving this dispute with the claimant. Find out who is handling the claim for the title insurer and phone that person every two weeks if you’re not kept informed.
Title insurers resolve mechanics’ lien problems every day. But it’s best to be “pro-active” just to be sure this mechanics’ lien doesn’t get foreclosed by the claimant. If unresolved problems develop, you might need to hire an attorney who specializes in title insurance, but that is unlikely to happen.
Q–Can we give our home to our son with the right for us to continue living in the residence until our deaths or until we can no longer live in it? Can we also do this with our vacation home? If we can do this, how should we word the deed?
A–You can quit claim both property titles to your son, reserving life estates in each property. But why would you want to do that?
There are many drawbacks to giving away your real estate, even if you and your husband retain life estates. Your son would take over your low adjusted cost basis. That means when he eventually sells the properties, he will probably have to pay a large capital gain tax. Also, you and your husband will likely have to pay gift tax liabilities now.
Another drawback is you won’t be able to sell those properties if you need cash.
Letting your son inherit the properties would be far better. Then he can get a new cost basis stepped-up to market value on the date of death. Please consult your tax adviser and attorney to discuss the adverse consequences.
Q– We are having a major problem with too many renters in our 64-unit condo building. At the moment, we have 24 rentals. Not only are some of these renters noisy and troublesome, but owners who want to sell their condos are having great difficulty. Mortgage lenders won’t approve loans because of the high 38 percent rentals. What can we do?
A–As the owner of a condo second home, I know condos can be great owner-occupied residences. However, absentee landlords and condo renters don’t have the same interest in keeping up the condo complex as do owner-occupants.
The high 38 percent of condos being occupied by renters indicates something must be wrong. Why don’t the owners want to live in the complex? If the drawbacks, perhaps poor maintenance or a bad management company, can be corrected to attract more owner-occupants, that will help .
The condo complex where I own a unit has a bylaw that a condo cannot be rented more than 12 months without approval of the board of directors. The result is owners who must move out, usually due to declining health, decide to sell rather than rent their condos. Thankfully, the complex is well-maintained with a waiting list of buyers.
My advice is to consult local condo management firms for their advice. Maybe your complex needs new professional management.
Q–I am a single, African-American mother of two, whose brother is willing to use his VA mortgage entitlement to help me purchase my first home. Is this possible? How can we do this?
A–Veterans Administration home loans require owner-occupancy. Unless your brother is part of your household and will be living in the home, he cannot use his VA mortgage entitlement to help you buy a home.
However, there are now several no and low down payment home mortgage purchase programs if you have good credit and good income. Consult a local mortgage broker who will take time to discuss FHA, PMI (private mortgage insurance), Fannie Mae, Freddie Mac and other low-cash home purchase plans.
Q–I understand I can make a tax-deferred exchange of an unimproved lot for a single-family house of equal or greater cost. To qualify for the tax-deferral, must I rent the house to tenants immediately after purchase, or can I occupy it for a few years and then rent it at a later time? My question occurs because mortgage lenders in my area want about 1.5 percent higher interest on rental property than for owner-occupied houses. I can’t find anything in Internal Revenue Code 1031 about this.
A–Internal Revenue Code 1031 requires all properties in a tax-deferred exchange to be held for investment or use in a trade or business. These are called “like kind” properties. In the example you gave of trading a vacant lot for a house, that house must be rented to tenants. If you occupy it as your personal residence, it is “unlike kind” property and disqualifies the tax-deferred exchange.
Q–We recently moved out of our home of many years and moved into a new home we purchased. Our former residence is now rented to tenants. When we recently consulted our tax adviser, he said that by moving out of our old home, we lost out on that $250,000 home sale tax exemption if we decide to sell that house. Is this true?
A–No. Your tax adviser is wrong. Fire him! Hire a better tax adviser who understands Internal Revenue Code 121.
It simply says that a principal residence seller is entitled to claim up to $250,000 tax-free sale profits (up to $500,000 for a married couple filing jointly) if the home has been owned and occupied by the seller an “aggregate” of two of the last five years before the sale.
That means you can rent your former principal residence up to three years before selling it and still claim the $250,000/$500,000 tax exemption. That’s because you owned and occupied it the previous two years. For more details, please consult a new tax adviser.
Q–About 20 years ago, my wife and I bought five rental condos in a small town. Today, they are worth about $40,000 each. I am now 74, and my wife is 68. These investments have been very good to us. We plan to keep them as long as we live. What is the best way to transfer these condos to our four children after our deaths and pay the least amount of taxes?
A–My recommendation is to hold the titles to those condos, as well as your home and other major assets, in a living trust.
The primary living trust purpose is to avoid probate costs and delays. A secondary advantage occurs if you or your wife becomes incompetent; then the other spouse (co-trustee) can manage the living trust assets, such as those condos, including sale or refinancing. The living trust can name your four children as beneficiaries after you and your wife die.
As you may know, when one spouse dies, the value of all assets left to a surviving spouse is free of federal estate taxes. This is the marital exemption.
When the second spouse dies, Uncle Sam will be waiting to impose federal estate tax on any net assets exceeding the $675,000 exemption. This estate tax exemption gradually increases to $1 million over the next few years. If your estate value exceeds $675,000 for each spouse, then you should consider an A-B Trust to double the exemption. Please consult an estate planning attorney for exact details.
Q–About seven months ago, we bought our home. We hired a professional inspector. He gave us a detailed, written report, but it neglected to disclose the roof is sagging from the weight of four layers of shingles.
When we had a minor roof leak recently, the roofer said our roof is in danger of collapse due to the age of the rafters and the heavy weight. Shouldn’t the inspector have noticed this?
A– Yes. However, getting the inspection firm to admit liability and pay at least part of the cost of removing the old roofs and installing a new one won’t be easy. Please consult a local real estate attorney for more details.
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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.
