Savvy home buyers turn inspection report into cash cow

Sellers agree to 'repair credit' after major defects uncovered
By: Robert J. Bruss: Inman News
DEAR BOB: Thank you for your constant advice that home buyers should make their purchase offers contingent on a satisfactory professional inspection report. That's what we did and are so thankful. We bought a very charming older "Craftsman" house in a great neighborhood. The seller and realty agent provided us with a written seller disclosure statement, which didn't reveal any serious problems. But our professional home inspector found several undisclosed serious defects of which the seller must have been aware. The inspector discovered attic rafters showed water stains, indicating a leaky roof, and the inspector noticed fresh landscaping on a hillside. Neighbors later told us the soil was unstable and had slid about 10 months earlier. When confronted with our professional inspector's report, the sellers readily agreed to a $30,000 "repair credit." We got a beautiful new top-quality roof installed for only $14,000 and a soils engineer assured us that a few "French drains" will solve the drainage problem for about $5,000. What shocked us was our buyer's agent discouraged us from obtaining an inspection. Is this common? – Frank W.

DEAR FRANK: Most real estate agents, especially buyer's agents, encourage their buyers to make their purchase offers contingent on a satisfactory professional inspection. Their primary motivation is they want to avoid after-sale lawsuits for undisclosed defects.

Out of fairness to your home seller, perhaps the attic roof leaks had not yet become obvious to the seller if there was no water evidence within the living area. But the seller should have disclosed the hill slide and any corrective action that was taken. Covering up a hill slide with new landscaping won't solve a drainage problem.

Congratulations on hiring a professional home inspector. I'm sure you will now enjoy many years of happy ownership in your Craftsman home.

IS THERE A FIVE-YEAR RULE FOR HOME-SALE TAX EXEMPTION?

DEAR BOB: In an article written by another newspaper writer, it said there is no five-year home ownership rule to qualify for the $250,000 tax exemption that you often mention. Is that writer correct a homeowner must live in the residence only two years? – Cecilia N.

DEAR CECILIA: Internal Revenue Code 121 says that to qualify for the principal residence sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly) the seller must have owned and occupied their home an "aggregate" 24 of the 60 months before its sale. The occupancy time need not be continuous.

If you bought your principal residence as recently as 24 months ago, and you occupied it those 24 months as your main home, you qualify for up to $250,000 (or $500,000) tax-free sale profits.

However, confusion arises if you acquired your principal residence in an Internal Revenue Code 1031 tax-deferred "like kind" exchange and you later converted it from a rental into your principal residence.

For any such principal residence sale after Oct. 22, 2004, IRC 121 requires at least 60 months of ownership (but only 24 months of residence occupancy) to qualify for the $250,000 or $500,000 exemption. For full details, please consult your tax adviser.

STEPPED-UP BASIS DOESN'T APPLY TO REAL ESTATE GIFT

DEAR BOB: You recently had several items about stepped-up basis for inherited property. Does the same tax rule apply if I give a rental house to my single-mom daughter where she can live with her son? The house is now worth around $275,000. But it only cost my late husband and me about $35,000. If I give the house to my daughter, will she have a $275,000 basis? – Sally R.

DEAR SALLY: No. The stepped-up basis rule only applies to inherited assets. It does not apply to lifetime gifts.

If you gift that rental house to your daughter, as the donee she will take over your very low $35,000 adjusted cost basis (probably even lower due to depreciation deductions).

Your situation is a classic example why I often say in this column it is better to inherit real estate than to receive it as a lifetime gift. For full details, please consult your tax adviser.

NO STEPPED-UP BASIS AFTER DIVORCE

DEAR BOB: Is there a stepped-up basis on a property after a divorce? My former husband and I had our home built in 1972. We divorced in 1984 and I got his quit claim deed for the home. I would now like to sell. The home has appreciated so much I am hoping the stepped-up basis rule applies to my situation – Peggy K.

DEAR PEGGY: Sorry, the stepped-up basis rule only applies to property inherited from a decedent. It does not apply to a property title transferred as part of a divorce. Your tax adviser can give you more details.

LIFE ESTATE HAS MANY SURPRISES

DEAR BOB: When my husband died about three years ago, he left me a life estate in his house which he owned before we married. My attorney told me I must pay the insurance, property taxes, and repairs. When I die, the house passes to my late husband's son who is extremely anxious for me to pass on or vacate the house. I have no intent to do either. Is there anything he can do to force me out? – Alicia R.

DEAR ALICIA: As long as you behave, and pay the insurance, property taxes, and repairs (presuming there is no mortgage), there is nothing the nasty remainderman son can do to force you to prematurely vacate your home. Your attorney appears to be giving you good advice.

CAN CONDO ASSOCIATION PROHIBIT RENTALS?

DEAR BOB: In 1987 my late wife and I bought a two-bedroom condo in an upscale complex. We lived there together until 1999 when she passed away. The next year, I decided to move to an assisted-living retirement home where I am very happy. My son rented my condo to a nice couple who have rented for five years. Their rent pays my living expenses. Now the condo association wants to prohibit rentals. They say renters cause too many problems and restrict buyers from obtaining mortgages on favorable terms. I can understand that. But don't I have any rights as a responsible landlord with well-behaved tenants? – Glenn W.

DEAR GLENN: Yes. I am very familiar with a similar situation, as the condo association where I own a second home recently enacted a similar rental restriction.

Upon the advice of our very savvy condo attorney, the condo board of directors stated in the CC&R (covenants, conditions and restrictions) amendment that the four existing rentals (out of 63 units) would be "grandfathered" to allow continued rentals.

That wise decision stifled any opposition. The "no rental" amendment then passed by a huge majority of the condo owners.

The CC&R amendment, however, allows our board of directors to approve 12-month rental "exceptions" such as when a condo owner vacates but plans to return, perhaps due to a health situation.

I suggest you consult the condo association's attorney to suggest the proposal be amended to allow a "grandfather" provision for existing condo rentals.

BAD TAX ADVICE COULD BE VERY COSTLY

DEAR BOB: We own a small vacation cabin, which is worth about $180,000. We purchased it in 1995 for only $80,000. This is a vacation home, which we do not rent out. We are thinking of selling it and buying a mobile home for about the same price. I understand there will be no capital gains tax unless your mobile home is priced lower than the selling price of our cabin. Correct? – Dianne C.

DEAR DIANNE: Wrong! Who gave you that horrible tax information? He or she is completely mistaken.

Your vacation home sale $100,000 capital gain does not qualify for any special tax exemption. It will be taxable at the current federal capital gain 15 percent tax rate, plus any state tax.

The fact you want to buy a mobile home is irrelevant. Please consult your tax adviser immediately.

HEIRS NEED NOT PAY REVERSE MORTGAGE

DEAR BOB: I've been looking into a senior citizens reverse mortgage although I am "only 72." My survivor's pension was recently cut drastically by $1,300 per month by my late husband's employer and there is nothing I can do. A speaker at the local senior citizens center explained reverse mortgages. They sound pretty good. I can receive $762 per month lifetime in my situation. That will greatly help. However, my mother and father lived to 86 and 94. If I live too long, will my son and daughter have to pay if my reverse mortgage balance exceeds my home's value when I die? – Victoria R.

DEAR VICTORIA: No. Senior citizen reverse mortgages are non-recourse. That means your home is the reverse mortgage lender's only security for repayment. If you live to 120, the lender's sole recourse is to sell your home after you die.

If the reverse mortgage balance exceeds the home's market value when you die, too bad for the lender. However, as usually happens, after the owner's death and the home is sold, the excess proceeds go to the heirs.

More details are in my brand new special report, "The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners," available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Questions for this column are welcome at either address.