Not All Proceeds From Home Sale Need to Be Used for Replacement
QUESTION: We have a problem I haven’t seen in your column before. Due to illness and unemployment, we must sell our home to pay overdue bills and avoid foreclosure. Our home should sell for at least $175,000 and we only owe about $92,432, so we will receive enough cash from the sale to pay our bills and have enough left over for a down payment on another house.
But we are receiving conflicting information from the IRS and a tax preparer as to our tax situation. We called the IRS and were told we must reinvest all our cash from the sale into another house of equal or greater cost if we are to avoid tax on our profit. But our tax preparer says all we need to do to avoid tax is buy a house costing at least as much as the net sales price of our current home. Who is right?
ANSWER: Your tax preparer is right. The IRS is wrong. The government’s own surveys show the IRS gives out incorrect information to at least 30% of the callers.
The roll-over residence replacement rule requires total profit tax deferral when you sell your home and buy a replacement principal residence of equal or greater cost within 24 months before or after the sale.
However, contrary to the information you obtained from the IRS, Internal Revenue Code 1034 does not require you to reinvest all your sale proceeds into your replacement home. If you wish, you can sell your old home for cash, spend it as you wish and defer your profit tax by buying a replacement home for nothing down (such as with a VA mortgage) if its cost equals or exceeds your old home’s net (adjusted) sales price.
It Is Better to Inherit Than Receive by Gift
Q: I am 72 and am thinking I should give my real estate away now to my three adult children to get it out of my estate. But my wife is opposed to the idea. Our net equity is about $2 million. Our children are very devoted to us and they would continue to give us the net rental income from these properties. We are comfortably well off. Do you think we should divide up our properties now while we are still in good health?
A: No. With careful estate planning, you and your wife can exclude at least $1.2 million of assets from federal estate tax. Giving your properties away now would hurt your children, because they will take over your low basis in the properties. However, if they inherit the properties they will receive a new basis, stepped-up to market value on the date the last spouse dies.
More Advantageous to Invest as Partnership
Q: Three of us want to buy land as an investment and include a buy-out agreement in case one of us wants to sell the property. Also, we want to specify what happens if one investor can’t pay his share of the property expenses, such as property taxes. We contemplate a 10-year holding period. One investor wants a tenancy in common but my lawyer suggests holding title in partnership. Which do you think is best?
A: The big advantage of holding title in a partnership is the partnership agreement can provide for many contingencies such as a buy-out agreement among the partners. A major disadvantage of a tenancy in common is one or more unhappy co-owners could bring a partition lawsuit to either force the division of the property or its sale. In my opinion, partnership ownership is much more flexible than holding title as tenants in common.
When Is the Best Time to Refinance Property?
Q: I have about $70,000 equity in my house. My fixed-interest rate is 10.25%, so I wouldn’t save interest by refinancing now. However, I could use the extra cash for an investment. When do you think I should refinance?
A: I don’t see any reason for you to refinance your existing mortgage because today’s fixed-interest rate is about what you are now paying. A better alternative might be to add a home-equity credit line mortgage.
Although the interest rate will be a little higher than 10.25%, the credit line flexibility allows you to pay interest only on the money you actually borrow. The money can be borrowed and paid back at your convenience. Home-equity credit lines are very advantageous. Shop around for the best deal among banks and S&Ls.;
Small Down Payment on a Home Is Not New
Q: In reply to a reader who criticized you for suggesting home buyers make a small down payment you said, “Uncle Sam makes me do it.” Then you explained the 1987 Tax Act makes it smart for home buyers to make the smallest possible down payment and obtain the largest available mortgage. My question is, before this tax law change, how much down payment did you advise home buyers to make?
A: Last week I had occasion to review some of my old columns. Way back in the dark ages of June 1977, in answer to a question, I replied: “Always invest as little cash as possible when buying property. Get the biggest mortgage you can afford.” That advice hasn’t changed, but now I can blame it on Uncle Sam’s tax law.
Finding Apartment Loan Is Not Easy
Q: I would like to buy the 23-unit apartment building where my mother resides. The owner and I have agreed on the price that, I think, is a bargain. I will be making a 25% cash down payment. But my problem is finding a lender willing to make a 75% fixed-interest rate mortgage. I can’t find such a loan, even at an interest rate up to 12%. All the lenders want to make is adjustables, and I think they are too risky. Any ideas?
A: Be thankful. Buying apartments today is usually not a good idea because the net income is rarely high enough to produce a decent yield on cash invested. Mortgage lenders realize this, so most don’t want to make apartment loans. Single family residence loans are far safer mortgages.
I hope your purchase offer has a finance contingency clause, so you can get out of the purchase if you cannot obtain the specified loan. But if you really want to buy that apartment building, consult a mortgage broker who is experienced placing apartment loans. The best mortgage brokers can find a lender for virtually every situation, although the cost often is not cheap.
Should Agent Remove Sign When House Sold?
Q: My wife and I recently bought a house. We have removed all the contingencies, have arranged our mortgage and are waiting for the sale to close early next month. But the realtor still has a “For Sale” sign on our house and there is even a lockbox on the front door.
I asked a friend to phone the agent and he was told the house is sold, but the brokerage has a similar house for sale nearby. The agent is obviously using the sign to “bait and switch” prospective buyers to other listings. She says it is her company’s policy. Don’t you think it is unethical to leave a for sale sign and a lockbox on a house long after it is sold?
A: Yes. But some realtors will argue that the house really isn’t sold until the deed is recorded. However, it would be virtually impossible to sell your house a second time, unless you canceled your purchase contract and the seller released you from further obligation.
Most real estate firms rush to put up a “Sold” sign because that is their best advertising to get more listings in the neighborhood. Other firms prefer a “Sale Pending” sign, but that is very acceptable.
However, if a “For Sale” sign stays up a long time on a house that indicates the agent may not be doing a good job.
Your friend’s report of the bait-and-switch tactic of the realty agent confirms the agent’s deception. As for leaving the lockbox on the front door, I don’t understand why the seller allows that, since the house is sold. After your sale closes, I suggest you report the matter to both the local Board of Realtors and to the state real estate commissioner for investigation and possible discipline against the agent.
Agent Protected If Home Sold by Owner
Q: Our home was listed for sale until the listing expired at the first of last month.
We decided to take the house off the market while we paint and recarpet. But a prospective buyer who saw the house while it was listed called last night to ask if we were still interested in selling. We said we were, so he and his wife are coming over in a few days for a second look. Then it occurred to me we may have pay the agent a sales commission because she gave us a list of prospects who saw the house and this couple’s name is on the list. What should we do?
A: Reread your listing contract. I’ll bet it has a “savings clause” that says if a prospective buyer who registered with you during the listing term buys the house within 90 days after the listing expires, then you owe the listing agent a sales commission.
Such a clause is intended to protect the realty agent if a registered buyer gets together with the seller to work out a sale after the listing expires.
Property Owner Bears Risk of Any Damage
Q: In mid-January we contracted to buy a house. But just a week before the sale was supposed to close, a fire damaged the house very badly. We obviously don’t want the house, even though the seller has offered to give us the fire insurance proceeds. However, the seller refuses to refund our $10,000 earnest money deposit, which is being held by the real estate broker. What should we do?
A: Destruction of the subject matter is grounds for canceling a real estate purchase contract. In other words, the property seller bears the risk of loss until the house is deeded to you. If necessary, retain an attorney to get your money refunded quickly.
Should Agent Sue Over Canceled Listing?
Q: I am a real estate agent with a big problem. About four months ago, I took a six-month exclusive right listing on a large elegant home. My broker spent a small fortune advertising the house, printing brochures, holding weekend open houses and doing everything possible to sell the house.
But the seller is very difficult. He wants a price that is considerably higher than market value and we told him so. We obtained two purchase offers, but he didn’t accept them and he wouldn’t make any counteroffers. Last week, the seller canceled the listing for no reason.
My broker thinks we should sue the seller for canceling the listing. The seller said he just changed his mind about selling. Our listing contract says the seller owes the full sales commission if he cancels the listing without cause.
A: Yes. You seem to have spent considerable time and money to sell this listing. The seller’s unjustified listing cancellation entitles you to the full sales commission as specified in the listing contract. You and your broker have nothing to lose and much to gain by suing for the sales commission.
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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.
