Survey Will Settle Dispute With Neighbor

QUESTION: We bought our home about four months ago. Since then we have had a dispute with our new neighbors about the location of our lot boundaries. We did not obtain a survey because we thought the boundary was where the fence is located. But the neighbor says the true boundary is about 18 inches on our side of the fence, and he wants us to pay half the cost to have a new fence built on the correct lot line because the current fence is in bad shape. Since we didn’t get a survey when we bought our house, our title insurance company refuses to help. What do you think we should do?

ANSWER: When it comes to lot boundary disputes, don’t believe your neighbor. Have your own survey made. Then you can compare the results of your survey with the neighbor’s survey. Mistakes are often made if the surveyor uses the wrong starting point or if the measurements are inaccurate. Be sure to hire a licensed surveyor, so your neighbor won’t challenge your survey.

If you learn the existing fence is in the wrong location--18 inches on your neighbor’s side of the property line, then the fence belongs to your neighbor, since it is on his side of the lot line. He then has the opportunity to either tear it down at his expense or leave it.

The laws of most states provide that if a new fence is to be built exactly on the lot line, called a division fence, then the two adjoining owners shall share in the fence cost. However, unless your city or subdivision requires fences between lots, you could inform your neighbor you do not want a fence. Then you will not be obligated to pay half the fence cost and if the neighbor wants a fence he will have to build it on his side of the boundary line at his expense.

An excellent book to study on this subject is “Neighbor Law” by attorney Cora Jordan, published by Nolo Press, Berkeley, Calif. For further details, please consult a local real estate attorney.

City Can Halt Rental of Illegal Apartment

Q: We are considering buying a house which has an illegal basement “in-law” apartment that was built for a previous owner’s mother. This studio apartment is currently rented to a college student for $150 a month. But the zoning allows only single-family houses. Is the rental illegal and can the city stop us from renting that apartment? We ask because the rental income is important to helping us afford the house.

A: Unless your city has a procedure for legalizing that illegal “in-law” apartment, its continued rental use is outlawed and can be stopped by local housing officials.

There are thousands of such illegal apartments, many built during the World War II housing shortage when zoning laws weren’t enforced. You should understand the city might enforce the zoning laws by forcing you to remove the cooking facilities and stop renting that apartment. If you need that rental income to afford the house, perhaps you should keep looking for a less expensive home to buy.

Try to Avoid Contract for Deed Purchase

Q: We are moving to Minnesota and have been shown a very nice house that would be ideal for our family. However, we only have about 10% for a down payment, so the realty agent suggests a 20-year contract for deed. A business associate advises my husband not to use a contract for deed. What do you suggest?

A: Your husband’s business associate gave good advice. A contract for deed, also called a land contract, contract for sale, agreement for sale, installment land contract, and a zillion other names in various states, means the property seller retains the title until all or an agreed number of payments are made by the buyer to the seller. Then the buyer obtains the deed.

If there is an existing mortgage, the seller continues making the mortgage payments with the funds provided by the buyer’s payments.

Tax Break on Repairs? Maybe Yes, Maybe No

Q: I am currently repairing our home we bought about a year ago. A friend says I can deduct these repair costs on my income tax returns. But my tax adviser, who doesn’t know much about real estate, says there is no such deduction. Is there?

A: Yes and no. Home repair and decorating costs for your principal residence normally have no income tax significance. However, if you are renovating your home, you should save the receipts and add the total cost to your home’s adjusted cost basis. The result will be a decreased taxable profit when you eventually sell your home.

Your friend may have been thinking of the special tax break for home repair and fix-up costs incurred within 90 days before the sale of your home and paid for within 30 days of its title transfer. Such home-sale fix-up costs can be subtracted from your home’s gross sales price to arrive at your adjusted or net sales price. I’m surprised your tax adviser didn’t explain this well-known tax-saving break.

Depreciation Formula for Home Made Rental

Q: When we bought our new home about six months ago we had difficulty selling our old home, so we decided to rent it to tenants. Since income-tax time is coming up soon, for depreciation purposes how do we calculate the cost of the house? We bought it many years ago for $26,000 and it is now worth at least $150,000. I know we have to depreciate it over 27.5 years, but what is our basis for depreciation purposes?

A: Home owners who convert their personal residence to rental status must depreciate the lower of its adjusted cost basis or its market value on the date of conversion. In your situation, that is your $26,000 cost.

Depreciation is a non-cash income-tax deduction for estimated wear, tear and obsolescence. It is the best tax deduction of all because it requires no cash payment.

However, during your years of ownership you probably added capital improvements, such as a room addition, renovations, or perhaps a new roof. Let’s suppose you added $20,000 of capital improvements, bringing your adjusted cost basis up to $46,000. However, from that amount you must subtract the nondepreciable land value at the time of purchase. Estimating the land value at $5,000, the result in this example would be you can depreciate $41,000.

Using the 27.5-year straight-line depreciation method means you can depreciate $1,490.91 each year for the next 27.5 years. However, since you only rented the house for six months in 1992, you can only depreciate $745.45 on your 1992 income-tax returns. For further details, consult your tax adviser.

Title Insurance Vital Especially With Cash

Q: We are buying a new home that will be completed next month (we hope!). The salesman asked if we wanted title insurance. Since we are buying from a reputable builder and paying cash for the house, I don’t think we need to waste money on title insurance, do you?

A: Yes, you especially need title insurance when you are paying all cash for a home. We recently had a court decision in my state where the home builder went to jail for failing to clear the title of encumbrances for his cash buyers.

If you were obtaining a mortgage, the lender would insist on title insurance. Every buyer of property should always obtain an owner’s title insurance policy, especially when paying all cash.