The ‘Pest’ Test: How Bad Can Nuisance Neighbors Get?
Question: We live in a nice neighborhood of owner-occupied homes. My husband and I are considering selling our home, but we have difficult neighbors next door. For example, shortly after they moved in, they painted a “no parking zone” in front of their house. The list goes on. They harass many of the neighbors, and one elderly couple is thinking of seeking a court restraining order. Are we required to disclose to our buyers that we live next to neighborhood pests?
Answer: You ask a difficult question. The answer depends on whether the situation has escalated to a “private nuisance” condition.
For example, a few years ago, a California appellate court said a seller had to disclose to the buyers that the neighbors were noisy and that the police had often been called to quiet things down.
Many of us live next door to neighbors whom we don’t especially like. If your difficult next-door neighbors have recently caused problems that required calling the police or taking other legal action, then the nuisance situation should be disclosed to your buyers.
Problems the “pests” caused to other neighbors, but not you, probably don’t have to be disclosed. For further information, please consult a local real estate attorney.
Tax Exemption Doesn’t Apply to Rented Home
Q: We have rented 25% of our residence property to tenants since 1965. We occupy the remaining 75%. In 1999 we sold the property. Depreciation has been deducted from the rental income as an expense on our Schedule E income tax returns. We have been advised that our profit on the sale of the rental portion does not qualify for that $250,000-to-$500,000 home-sale tax exemption. Is that true?
A: Yes. Your tax advisor is correct. For income tax purposes, you sold two properties. One was your personal residence, which qualifies for the $250,000 tax exemption ($500,000 for a married couple filing jointly) if you owned and occupied your principal residence an aggregate two of the five years before the sale.
The other sale was the rental portion, which does not qualify for the principal residence exemption. Your capital gain on the 25% rental area will be taxed as a long-term capital gain.
To illustrate, suppose the property sold for $100,000 and 75% was used as your personal residence and 25% for rental. Of the $100,000 sale price, $75,000 would be allocated to the residence portion sale, and your exemption would apply. The remaining 25%, or $25,000 in this example, will be subject to capital gain tax.
Reserve Credit Line Can Buy Roof and Car
Q: I am a widow, 77, in reasonably good health. I live alone in my house, which my late husband and I bought 38 years ago. My neighbors are wonderful, and I like the neighborhood. I own the house free and clear. I live comfortably off Social Security, plus a few hundred dollars interest from bank CDs.
My daughter and son-in-law showed me your reverse mortgage information. They think I should get one, but I always seem to have plenty of money in my checking account. However, the house will soon need a new roof, and my car is 11 years old. Do you think I should get a reverse mortgage?
A: Since you don’t need additional monthly income now, a tax-free reverse mortgage for lifetime income might not be right for you. However, another popular reverse mortgage choice is the credit line alternative. You might want to arrange a reverse mortgage credit line now in anticipation of using it to pay for the new roof and possibly a new car.
If you later need monthly reverse mortgage income, such as to pay for increased living expenses, you can use a reverse mortgage for that purpose.
Here’s an Alternative to the 90-Day Listing
Q: As a real estate broker, I have used your columns for education in my firm for many years. You are almost always right on the mark, with one exception.
You frequently tell home sellers to sign a 90-day listing. That might work in some areas, but in our area, by the time the advertising is prepared and ordered, it takes almost a full month to get the ad coverage we give our clients, especially in the monthly realty magazines.
Most realty agents in our area take six-month listings. When a seller wants a 90-day listing, we know they have been reading your articles, and we have a tough job convincing them to give us more time.
A: We agree that in some areas it can take more than 90 days to sell a home. The simple solution for your situation is to offer sellers six-month listings with an unconditional cancellation clause after 90 days.
This prevents realty agents from taking six-month listings, putting them into the local multiple listing service and then sitting back and waiting for another agent to sell the listing.
For example, when I was in Washington, D.C., recently, a friend from New Jersey complained he has not received even a low purchase offer on his home listed for sale since April. Whatever the reason for lack of sales activity, he wants to switch to a more aggressive realty agent. He said the listing agent hasn’t contacted him in more than a month. Unfortunately, my friend signed a six-month listing and is stuck with that listing agent.
That’s why I advise sellers to sign either a 90-day listing or, in areas such as yours, where agents can justify longer listings, a six-month listing with an unconditional cancellation clause after 90 days. If the listing agent is doing a good job, he or she won’t have to worry about sellers canceling.
Surviving Spouse Owes No Inheritance Tax
Q: Please clarify. If a husband and wife hold title to their major assets in joint tenancy with right of survivorship, when one spouse dies, how much estate tax does the surviving joint tenant owe? Another question: Suppose I want to give away $10,000 to my adult son each year. Can I include a condition that he cannot touch the money as long as I’m still alive?
A: No matter the amount of assets left to a surviving spouse, no federal estate tax is due. This is called the “marital exemption.”
Under this exemption, you or your spouse can receive millions of dollars by will, joint tenancy survivorship or other means and still not owe federal estate tax at the time of the first spouse’s death.
However, when the second spouse dies, Uncle Sam will be waiting to collect estate taxes. For people dying in 2000 or 2001, there is a $675,000 combined federal estate and gift tax exemption. Amounts exceeding that exemption are taxed up to 55%.
As you probably know, gifts up to $10,000 per donor per year are free of federal gift tax. For it to be a true gift and to get it out of your estate when you die, there can’t be any strings, such as a condition that your son cannot touch the money while you’re alive. For details, please consult an estate planning attorney.
Quiet Title Lawsuit Should Solve Problem
Q: Before I can sell my rental property, the title must be cleared. I bought it with financial help from a person with poor credit. I gave him 49% ownership, which was supposed to be deeded back to me when I paid him back, which I did.
Meanwhile, he fraudulently signed five deeds to his friend, his daughter and others. The title insurance company shows these five other names on the title. I made all the payments, paid all the insurance and paid all the taxes. I can prove it with my income tax returns. I went to an attorney, who said he would bring a quiet title lawsuit. Now he says that’s not the way to go. To complicate matters, this co-owner is now dead. What should I do?
A: It sounds like your attorney was on the right track to bring a quiet title lawsuit asking the court to decide who owns what interest in the property. I don’t understand why he stopped the quiet title action to clear up your title.
Perhaps you need a more aggressive attorney who specializes in real estate. The title insurance company that checked your title can probably recommend several local real estate attorneys who specialize in title matters to clear up your title.
Divorce Triggers Sale, So There’s No Taxation
Q: My husband and I are divorcing. We owned our home for 16 years. It is now listed for sale. As part of the divorce settlement, I will receive all home-sale proceeds, about $90,000. I want to buy a manufactured home in a mobile home park. Its cost should be much less than the net proceeds from the sale of the house. What should I do with the excess money to avoid paying income tax on it?
A: I have good news. Thanks to Internal Revenue Code 1041, property transfers between spouses and transfers that are part of divorce proceedings are not taxable.
Because the house is being sold, if you owned and occupied the home an aggregate two out of the five years before the sale, up to $250,000 of your profits are tax-free. Please consult your tax advisor, but thanks to these great tax rules, it looks like you won’t owe any capital gains tax on your home sale.
In Uncharted Waters, Consult a Tax Expert
Q: In 1976 we bought our home on two acres for $60,000. A developer is now subdividing our property into four lots. He will buy three lots for $150,000. We will continue to own and live in our house on a half-acre lot. I have been advised that we must pay capital gain taxes on a large part of the $150,000 sale price. Apparently, if we had sold everything for $350,000, we would owe no tax.
Is this true? What if we sell everything to the developer, including our house, for $350,000 and then buy the house back for $200,000? At what point does fairness turn into a tax scam?
A: Internal Revenue Code 121, which allows a $250,000 per person principal residence sale exemption (up to $500,000 for a married couple filing jointly), requires ownership and occupancy an aggregate two out of the last five years before the sale. A “reasonable amount” of adjoining land can be included in the residence sale. It appears that you qualify to sell your entire property if it has not already been subdivided into separate lots.
If I were an IRS auditor checking your income tax returns, I would question your prearranged agreement to buy back your house on its half-acre lot for $200,000. I’m not sure there is a right or wrong answer to your questions, but please consult your tax advisor before doing anything.
Put Muscle Into Battle Over Private Insurance
Q: I want to get rid of the private mortgage insurance on my condo, which I bought in June 1999. My mortgage servicer told me that the principal balance of my mortgage loan must be 80% or less of the original value of property or 75% of the current value in order to be eligible for deletion of the insurance.
My condo was recently appraised by an appraiser whom my mortgage servicer selected. The ratio between the remaining debt and the appraised value is 75.7%, but now my mortgage servicer says only my purchase price will be accepted as the original value, not the appraisal that the servicer ordered. My ratio using the purchase price is 85.9%, so the mortgage servicer refuses to cancel my insurance. The mortgage servicer seems to change policies to make me keep paying. What can I do?
A: Get tough with your mortgage servicer. I presume you had to pay for that mortgage servicer-approved appraisal. In a polite letter, explain that you relied on the written representation of the mortgage servicer and that because the loan-to-value ratio is well below 80%, insurance is a waste of money and unnecessary to protect the lender.
I presume you’re spending a typical $100 per month or more, so fighting your mortgage servicer is worth it. If you don’t get a satisfactory reply from the mortgage servicer within 30 days, phone the servicer and find out who owns your mortgage. The servicer must tell you.
If you’re lucky, Fannie Mae or Freddie Mac owns your mortgage. Their policies about dropping private insurance are quite reasonable, especially because your mortgage is below 80% of your condo’s market value. If necessary, write to the CEO of your mortgage owner. Be persistent. Don’t give up. You’ve got everything to gain and nothing to lose.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, CA 94128. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.
