DEAR BOB: A former friend recently went through a divorceand his finances are a mess. To help him out, we offered to buy out his condoequity of about $21,000 for cash. He gave us a quitclaim deed, which werecorded. We bought “subject to” its existing mortgage. However, he”forgot” to tell us the condo homeowner’s association has an $8,700special assessment lien against the condo. When I confronted him, he said hewas sorry but he had forgotten about the lien, which the association nowthreatens to foreclose on us. He doesn’t have any money to pay us the $8,700.Do we have any recourse? –Nancy T.
DEAR NANCY: If you don’t pay the $8,700 condo assessmentlien before the association forecloses, you could lose the condo. Yes, yourfriend is liable to you for the $8,700, but, if he can’t afford to pay you,suing him to obtain a judgment might not be worth the hassle.
Purchase Bob Bruss reports online.
Your situation shows the importance, especially when buyingreal estate from a friend or relative, to always obtain an owner’s titleinsurance policy. If you had done so, the owner’s title policy would haverevealed that recorded $8,700 homeowner’s association lien and you could havededucted the $8,700 from the $21,000 cash you paid to your former friend.
$800 MONTHLY NEGATIVE CASH FLOW CAN BE PAINFUL
DEAR BOB: After a recent divorce, I purchased a townhouse.Since my girlfriend and I are considering getting a bigger place, I am thinkingabout renting the townhouse because, if I sell it now, I would have to payabout $30,000 to get out of the house. Based on nearby comparable rentals, if Irent the townhouse I will lose about $800 per month (difference between themortgage payment and rental income). I’m hoping that by losing $9,600 per yearfor one or two years, the local market will appreciate and make the eventualtownhouse sale less painful. Am I required to depreciate the townhouse onSchedule E of my income tax returns? As I will have an “unclaimed”excess mortgage interest deduction (the monthly rent won’t cover the mortgageinterest), can I claim the remainder of the mortgage interest on my Schedule Aitemized deductions? –Cory F.
DEAR CORY: I hope you are a very wealthy man who can afford$800 monthly negative cash flow. Please consult your personal tax adviserbecause you are acting under several erroneous tax considerations.
The first one is depreciation must be deducted for a rentalproperty even if that depreciation deduction doesn’t save you any income taxand provides no immediate tax benefit. You must depreciate the townhouse (butnot the value of the underlying land) at a 27.5-year, straight-line rate.
The second one is unused rental property mortgage interestis only deductible on Schedule E of your tax return. The unused portion cannotbe deducted as a personal itemized interest deduction on Schedule A of your taxreturns.
If your rental townhouse shows a tax loss, as it surelywill, presuming you are not a “real estate professional” such as afull-time sales agent entitled to unlimited passive activity loss deductions,you can deduct up to $25,000 tax loss per year against your ordinary income ifyour AGI (adjusted gross income) is below $100,000.
The good news is any undeducted loss from your rentaltownhouse can be “suspended” to save for use in future tax years orwhen you sell the property at a profit. Frankly, if I were in your situation Iwould stay in the townhouse and forget about renting it. If your girlfriendinsists on a bigger home, maybe she’s not right for you.
THE KEY REASON A HOUSE HASN’T SOLD SINCE APRIL
DEAR BOB: My wife and I have had our house on the marketsince April but have had no offers yet. We’ve been competitively priced and aregoing to take the house off the market for the holidays. After New Year’s, weare thinking of putting it back on the market ourselves without a listingagent. Then we can afford to sell for less without a sales commission. Weunderstand we will lose the benefit of the multiple listing service (MLS), butit hasn’t helped much so far. What happens if we do that and the buyer has anagent? –Frank G.
DEAR FRANK: Presuming your house has been listed for salesince April with a successful sales agent in your vicinity, the key reason ithasn’t sold is probably because it is overpriced.
Just in case you are not aware, most areas are in a”buyer’s market,” meaning there are many more homes for sale thanthere are qualified buyers actively looking.
Taking your home off the market during the holidays is agood idea. You don’t sound very motivated to sell, and your house is a”tired listing,” so give it a rest for a while.
If you couldn’t sell your home with an agent, what makes youthink you could sell it without one? Should a prospective buyer who has abuyer’s agent decide to buy, you will be asked to pay half of a salescommission to that agent, typically 3 percent of the gross sales price.
I do not recommend you try to sell your home alone in thisbuyer’s market without a listing agent. More details are in my special report,”How to Sell Your House or Condo for Top Dollar in a Buyer’s Market,”available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant internet delivery at
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News