Impending housing bubble inspires many to sell

Is now the best time to take the money and run?
By: Robert J. Bruss: Inman News
DEAR BOB: I can't believe the high prices home sellers are receiving in my neighborhood. But I've read in the Wall Street Journal and elsewhere that we may be in a "real estate bubble" for home prices and today might be the time to sell. What is your opinion? – Richard C.

DEAR RICHARD: When I bought my first property more than 38 years ago, the Realtor proudly told me home prices in the area appreciated an astronomical 3 percent in the previous year.

I quickly figured a 3 percent return on my cash down payment was a terrific return. That's called "leverage," meaning the owner controls the property with a small investment. Someday, I should write a whole article about leverage benefits.

Recently, the National Association of Realtors reported the median U.S. home value appreciated 15 percent in the last 12 months. But in 2004, homes only appreciated about 10 percent, according to NAR.

That means, for example, a home buyer who made a $10,000 cash down payment to buy a $100,000 house (if you can find one) earned 50 percent, or $5,000, on that $10,000 cash investment.

Of course, average home market-value appreciation varies widely by location and even specific properties.

But the real estate value trend has always been up. However, along the way there are peaks, valleys and plateaus.

My best advice, if you want to sell your property, is sell now and enjoy your profit. If you have no reason to sell, enjoy the property. Even if its market value plateaus, or even drops a little, unless you recently purchased the property very recently you probably still have a handsome profit.

Is this a good time to buy a home, I am often asked (especially on radio talk shows). My answer is it is always a great time to buy a home but never make more than a 20 percent down payment so you limit your maximum loss.

Real estate is a long-term investment, not a get-rich-quick scheme, so plan to hold your property at least five years.

IF HOME IS IN A LIVING TRUST, DO HEIRS GET A STEPPED-UP BASIS?

DEAR BOB: My mother owns a wonderful house worth about $1.2 million. When she passes on, my two sisters and I are her living-trust beneficiaries. Although the house is held in her living trust, will we get a new stepped-up basis to market value? – Jerry VonB.

DEAR JERRY: Yes. Holding real estate title in a living trust is just an ownership method, such as tenancy in common, joint tenancy or partnership. A living trust has no effect on the stepped-up tax basis rules for inherited real estate. For more details, please consult your tax adviser.

GET A NEW TAX ADVISER IF YOURS CAN'T EXPLAIN A STARKER EXCHANGE

DEAR BOB: You often refer to a "Starker exchange" of investment property. My CPA and real estate brokers I know have never heard of this tax concept. The whole process seems quite complicated if I sell my rental property. But the tax savings could be very profitable for me. What should I do? – Pete W.

DEAR PETE: Hire a new tax adviser. If your tax adviser or real estate broker doesn't understand Starker exchanges for investment property, found in Internal Revenue Code 1031(a)(3), you need to locate a new tax adviser and a new real estate broker.

This is very basic tax saving information for real estate investors. For full details, I suggest you invest $4 to receive my special report, "How the New Tax Deferred Exchange Rules Can Make You Very Wealthy," available from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.