QUESTION: When I bought my home, the FHA sent out an inspector who thoroughly checked out the house before approving my FHA mortgage. But now, severe cracks have become apparent in the foundation. Do you think the FHA should pay for the repairs, since the FHA inspector failed to report them?
ANSWER: No. When a mortgage lender sends an appraiser to evaluate a home before a loan is made, the appraiser is there to estimate the home’s market value. The person sent by the FHA lender to evaluate your home was most likely an appraiser, not an inspector.
Although FHA and VA can be especially demanding about having necessary home repairs completed before the mortgage is approved, these lenders are not guarantors of the home. A lender merely loans money secured by the property.
The mortgage lender does not take the responsibility of guaranteeing the soundness of the residence. That would be an awesome job that would require charging high interest rates and hiring personnel much more skilled than most appraisers.
If your home is relatively new, the home builder may be liable to you for the cost of repairing the foundation. Better yet, if the home builder provided a third-party warranty, such as one from Home Owner’s Warranty Corp. (HOW), then HOW will take care of the repairs if the builder is unable to do so. Incidentally, these third-party warranties are usually only provided by top quality builders.
Financing Home Buy With Building Sale
Q: I own a small neighborhood combination office and store building in which I have about $350,000 net equity. That would buy a very nice home for me. Is there any way I can trade my building for a house without having to pay tax on my profit?
A: Yes. But you will need to be flexible. To qualify for an IRC 1031 tax-deferred exchange, both properties must be “like kind.” That means they must be held for investment or for use in a trade or business. However, like kind does not mean “same kind.” You can trade your income property for a rental house that is rented to tenants. But you cannot trade it for a personal residence, since it is not like kind.
The solution is to exchange your building for a rental house. Later on, you can convert the rental house into your personal residence. However, to qualify for a tax-deferred exchange you must trade up to a more valuable property without receiving any taxable “unlike kind” personal property such as cash or net mortgage relief.
Replacement Home in Foreign Country
Q: My husband and I are well over 55, so we qualify for that $125,000 “old folks” tax break you often discuss. However, our home sale profit will be at least $200,000. Some time ago you told another over-55 seller that he could avoid tax on such a sale by purchasing a replacement home. If we do that, can we buy a home in a less expensive foreign country, such as Mexico or must it be in the United States?
A: Yes, it can be in a foreign country. Let me give an example of how you can combine the “over 55 rule” with the “roll-over residence replacement rule” of Internal Revenue Code 1034, which is available to home sellers of any age.
Suppose your principal residence sells for $275,000 net sales price and you have a $200,000 profit (which means $75,000 is your adjusted cost basis). Subtracting your $125,000 “over 55 rule” exemption from the $275,000 net or adjusted sales price produces a $150,000 “revised adjusted sales price.”
If you buy a replacement principal residence costing at least $150,000 in this example within 24 months before or after the sale, you can then defer the tax on the remainder of your sale profit.
The replacement home can be in a foreign country if you wish. Please consult your tax adviser for further details.
Seller Financing Usually Good for Buyer
Q: I have been offered a house to buy, but the seller wants to carry back the mortgage. The price is not a bargain, but it isn’t overpriced either. Although the seller says she will carry the mortgage for five years, I think I can talk her into a 10-year term. Are there any disadvantages of seller financing of which I should be aware?
A: There are many advantages and virtually no disadvantages to seller financing. The difficult part is finding sellers who realize the advantages for them. I find the best candidates for seller financing are elderly home sellers of vacant homes who need extra retirement income at a higher yield than can be safely earned elsewhere.
Seller financing advantages for buyers include easy financing, no loan qualifying by a tough lender, competitive interest rate, flexible terms, such as interest only, quick closing with minimum paper work and no loan costs. There really aren’t any disadvantages of seller financing for the buyer.
Beware of Tax Cost in Selling Your Home
Q: We bought our home for about $90,000 several years ago. Today, is it worth around $220,000. About a year ago, we refinanced it for $160,000. We plan to sell our home and rent an apartment that will be much less expensive. Will our profit tax be figured on the $60,000 difference between $220,000 and $160,000 or the $130,000 difference between $220,000 and $90,000?
A: I have bad news. Your taxable profit will be the $130,000 difference between your $220,000 adjusted (net) sales price and your $90,000 adjusted cost basis. To make matters worse, you have an “excess mortgage” of about $70,000 ($160,000 minus $90,000), which is money you received when you refinanced, but you will owe tax on it at the time of sale.
Although you may save money by renting an apartment, the $36,400 tax on at least 28% of your $130,000 profit, and considering that you will only receive about $60,000 of net cash from the sale, makes the sale of your home without buying a qualifying replacement an undesirable situation. Before you sell, please consult your tax adviser.
Why Financing Vacant Land Is So Difficult
Q: I found a parcel of vacant land that should go up in value substantially over the next five years. But I am having trouble finding a mortgage lender who will finance my purchase from an estate that refuses to carry the mortgage. Any ideas?
A: Now you know why land investing is so risky. A major problem is the lack of financing. Most banks, S&Ls; and other lenders refuse to finance raw land because of the high risk. Because of the financing difficulty, most land sales are financed by the property seller. Since your seller refuses to finance the sale, perhaps you should be grateful. Maybe this is a signal you shouldn’t buy that speculative land.
Don’t Give Up on Impound Overcharge
Q: We have a mortgage that requires us to pay one-half of taxes and fire insurance each month. The balance in this impound escrow account is now about $800 more than will be needed to pay the taxes and insurance in 1990. But the lender refuses to adjust our monthly payment or make a refund to us out of this account. What can we do?
A: Don’t give up. The squeaky wheel gets the oil. Keep complaining to the lender and insist on either a refund or a reduction in your monthly payment until the impound escrow balance is more reasonable. If necessary, phone the lender daily until you get the result you want. Talk only to a supervisor. If necessary, insist on talking to the lender’s president.
Be Careful of an ‘As Is’ Home Purchase
Q: I don’t have much money for a down payment on a home, so I can’t be too fussy. However, I found a run-down home in a very desirable neighborhood. The problem is it is being offered for sale “as is” by an estate. Are there any pitfalls to an “as is” property purchase?
A: Yes. An “as is” sale means the seller will not pay for any repairs and does not make any warranties or representations about the property’s condition. In other words, be very careful. Make your purchase offer contingent upon your approval of a professional property inspection, so you know the defects of the property if you decide to go ahead with the purchase.
Protect Your Heir With a Living Trust
Q: I am in poor health. My son manages several apartment buildings for me. When I die, they will go to him. Would it simplify my estate if I have appraisals of the properties made now before I die?
A: No. After you die, your estate will have appraisals made of the properties because your heir will receive a new basis stepped-up to market value as of the date of your death.
If you want to save your son the costs and delays of probate, you can do him a big service by placing your properties into a living ( intervivos ) trust before you die. You are the initial trustee and beneficiary, so you can deal with the properties as you now do. But upon your death or disability, your alternate trustee (presumably your son) takes over managing the assets.
When you die, your properties in the living trust will go to the new beneficiary without having to go through probate. Ask your attorney to explain the benefits of living trusts further.
Mixed Property Sale Has Mixed Tax Result
Q: We live in one apartment of a four-apartment building that we own. The owner of the adjoining building made us a purchase offer that is too good to resist. However, we are worried about the tax we would have to pay. As we are well over 55, I understand we can use the $125,000 tax exemption, but our profit will be around $200,000. Is there any way to get out of paying tax on our profit over $125,000?
A: Let’s back up. The “over-55 rule” $125,000 home sale tax exemption only applies to the sale profit on your personal residence (the value of your apartment). It does not apply to your sale profit on the three rental apartments. The only way to avoid tax from the profitable sale of the rentals is to make a tax-deferred exchange. Since you already have a cash buyer, it should be relatively easy to make an IRC 1031(a)(3) Starker delayed exchange. Please ask your tax adviser to explain further.
When Renting Is Better Than Buying
Q: My husband is moving up very rapidly with his company, and he just received another out-of-town job transfer. It was only about 18 months since his last promotion. The company will pay our relocation costs and the probable small loss on the sale of our home after all the sales costs are paid. Since we are uncertain how long it will be before the next promotion, do you think we might be better off renting a house rather than buying?
A: Yes. Frequent transferees are wise to rent instead of buying a home. A lease with option to purchase would be even smarter because then you can either buy if the expected transfer doesn’t materialize or sell your purchase option for a small profit if you decide not to buy.
When Loan Interest Is Tax-Deductible
Q: Last year, we bought our home subject to its existing VA mortgage. We paid a $45 transfer fee. But the loan is still in the seller’s name. However, we hold legal title to the house. Can we deduct the mortgage interest?
A: Yes. Since you must make the mortgage payments or lose the house by foreclosure, you are entitled to deduct the mortgage interest which you paid. In legal talk, you have the “benefits and burdens” of ownership.
However, if you were voluntarily making mortgage payments for a friend or relative, but had no risk if you didn’t make the payments, then you would not be entitled to deduct the mortgage interest. An example of non-deductible interest would be if you paid your mother’s mortgage payments, but were not on the title to her home.
Short Time for Home Offer Acceptance Best
Q: At a Sunday open house we found what we thought was our dream house. The listing agent was a little upset because we wanted to offer $8,000 below the asking price, but she prepared our purchase offer for us. As we are first-time home buyers, now we realize we should have had our own agent.
When our offer was typed up, it specified a 14-day time limit. We thought that was normal and didn’t question it. A few days later we phoned the agent to inquire if our offer had been accepted.
She said she was sorry, but another buyer offered a few thousand dollars more and the seller accepted the other offer. I told her we would have matched that offer as we really wanted the house. Last night, I talked to our family attorney and he said it was gross negligence for the agent to make our offer valid for 14 days. Do you think we should sue the agent who, we now understand, worked for the seller rather than for us?
A: No. Forget it. I agree with your attorney that the 14-day time limit on your purchase offer was far too long. One or two days is customary, unless the seller is out of town or difficult to locate.
Your situation is a classic example of why home buyers should be aware of whom the agent represents. Many states now require agents to disclose in writing to buyers whether they represent the seller only, the buyer only, or both the buyer and seller (called a dual agency).
But I suggest you forget the dispute and get on with finding another home to buy. Chances are you will find one you like even better.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128.