Why paying cash for condo is not recommended

DEAR BOB: I am downsizing and plan on paying cash for mynext residence. Are there any hidden dangers in paying cash? –Mark N.

DEAR MARK: Please don’t do that unless you are: (1) verywealthy, (2) will be spending cash you never need to see again, and (3) you canafford to tie up a large amount of cash in one asset.

Purchase Bob Bruss reports online.

A better alternative is to pay a 20 percent or 25 percent cashdown payment and obtain a fixed-rate 15- or 30-year home mortgage for thebalance of the purchase price. Then, just in case you bought a “badhouse” or a “bad condo,” you won’t have all your nest egg tiedup. After a few years of owning and living in the home, if all turns out well,then you can pay off the mortgage (of course, be sure it doesn’t have aprepayment penalty).

I still recall a nightmare letter I received a few years agofrom a retiree who bought her retirement condo for all cash. Only after movingin did she discover the complex was badly managed and occupied by about 50percent renters who caused many problems.

When she tried to sell her condo, she discovered mortgagelenders either refused to loan to new buyers or they charged very high interestrates because of the high risk with so many renters. The only way she could gether cash out was to sell to another all-cash sucker. I don’t want you to becomean all-cash sucker buyer like that.

RENTAL CONVERSION DOESN’T LOSE $250,000 HOME-SALE TAXEXEMPTION

DEAR BOB: I own a house that I lived in for four years untillast month when I converted it to a rental. If I sell it within 24 months, willmy cost basis be calculated on my original purchase price or on the propertyvalue when I converted it to a rental? –Leonard H.

DEAR LEONARD: Market value on the date of conversion torental status is irrelevant. Your adjusted cost basis for the house is youroriginal purchase price, plus capital improvements you added during ownership.This is your basis for calculating your rental depreciation deductions.

Presuming you meet the 24-out-of-last-60-months,primary-residence ownership and occupancy tests of Internal Revenue Code 121,you can rent the house up to 36 months after moving out before losing your$250,000 principal-residence-sale tax exemption. However, upon sale, thedepreciation you deduct during the rental period will be taxed at the special25 percent federal recapture tax rate. For details, please consult your taxadviser.

HOW TO ADD NEW SPOUSE TO HOME TITLE

DEAR BOB: About three years ago I bought a condo as myprimary residence. I recently got married and want to make my wife a co-ownerto make conveyance easier if something happens to me. Refinancing isn’t anoption because the interest rate would go up by about 2 percent. What do yourecommend? –Jerry T.

DEAR JERRY: You can sign and record a quitclaim deed to yournew wife for a 50 percent interest in the property. If you want her to receivefull ownership if you die first, holding title as joint tenants with right ofsurvivorship (or as tenants by the entireties in states allowing that methodfor married couples) avoids probate upon a co-owner’s death. If she dies first,then you become the sole owner again.

Better yet, a revocable living trust can specify that whenyou pass on she receives title to the condo. That way, just in case yourmarriage doesn’t work out, you haven’t given up control of the condo. But whenyou die she receives the title without probate. ???? Also, there are additional living-trust benefits if you becomeincapacitated such as with Alzheimer’s disease or a severe stroke. Your wifeshould probably be named successor trustee to your living trust. More detailsare in my special report, “24 Key Questions Answered: Living Trust SecretsReveal How to Avoid Probate Costs and Delays,” available for $5 fromRobert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

SOME QUESTIONS DON’T HAVE SPECIFIC ANSWERS

DEAR BOB: About 18 months ago, I purchased a tenancy incommon (TIC) with a partner. There are two houses on one lot. We recentlyconverted them into two separate condos. I have been living in my house sincethe purchase. I plan to sell my condo house next spring, two years after weoriginally purchased as a TIC. Does the $250,000 principal-residence-salecapital gains exemption of Internal Revenue Code 121 apply from the date theTIC was purchased or from the date it was converted into a condo? –John M.

DEAR JOHN: Nobody knows the answer to your question forsure. Presuming you meet the 24-out-of-last-60-months, primary-residenceownership and occupancy tests of IRC 121 by the time you sell, I would arguethe 24 months began when you became a TIC and moved in.

Conversion to condominium ownership was to improvemarketability and was a continuation of that ownership. Sorry, there are norulings or other information available on your unique situation. Please consultyour tax adviser for more details.

DOES MORTGAGE CO-SIGNER OWN PART OF THE HOUSE?

DEAR BOB: My boyfriend and I got the mortgage for my housetogether. I put a $30,000 cash down payment on the house. The title is in myname only. But the mortgage is in both our names. Is he entitled to half of thehouse? – Lupe B.

DEAR LUPE: I presume your boyfriend co-signed the mortgagebecause he has good income and great credit. Most mortgage lenders insistco-borrowers be on both the mortgage loan obligation and on the title. Yoursituation is quite unusual.

Based on your description, if your boyfriend’s name is noton the title, he didn’t make any down payment, and if he doesn’t pay part ofthe mortgage, property taxes or home repairs, he appears to have no ownership interestin the house. For details, please consult a local real estate attorney.

CAN SOLE HOME SELLER EXCEED $250,000 TAX EXEMPTION?

DEAR BOB: Can a single home seller claim more than the$250,000 primary-residence-sale tax exemption by using the entire capital gainto buy another home for a higher price than the residence sold? –Kevin C.

DEAR KEVIN: No. As a sole home seller, you are limited tothe $250,000 principal-residence-sale tax exemption of Internal Revenue Code121. That’s presuming you owned and occupied your primary home at least 24 ofthe last 60 months before its sale.

Purchasing another home for greater cost won’t increase yourexemption. For details, please consult your tax adviser.

CAN ONE RENTAL PROPERTY BE TRADED TAX-FREE FOR TWO?

DEAR BOB: My rental property is worth about $590,000 and hasa $376,601 mortgage. If I sell, to avoid tax do I have to invest all my profitsinto another property or can I use a small amount to invest in a secondproperty? –Tracy McG.

DEAR TRACY: To qualify for an Internal Revenue Code 1031tax-deferred exchange, you must trade equal or up in both property value(s) andequity. You can trade your one investment property for two or more rental orbusiness properties if the totals equal or exceed what you receive for yourcurrent rental property.

The amount of the mortgage(s) on the acquired propertiesmust equal or exceed the old mortgage balance. If you keep any cash or netmortgage relief from the trade, that is taxable “boot” to you. Pleasework with a qualified third-party intermediary accommodator to be certain yourtransaction qualifies as a tax-deferred exchange.

MARRIAGE INCREASES HOME-SALE EXEMPTION TO $500,000

DEAR BOB: I sold my principal residence on March 15, 2005,and took my $250,000 tax-free capital gain. I had lived there two of theprevious five years. On Jan. 1, 2002, I moved in with my fiance so we have nowlived in his house together for three-and-a-half years. I was not on his deed,however, until we married a month ago. Can we now sell this property (hisresidence for the last 10 years) and take a $500,000 tax-free capital gain?Does the clock start when I moved in or when I was on the deed? –Linda F.

DEAR LINDA: You are in luck. If you meet the24-out-of-last-60-months occupancy test (as you do) and you are married to thetitle holder at the time of the principal-residence sale, you and he canqualify for up to $500,000 tax-free principal-residence-sale profits if youfile a joint tax return in the year of the home sale.

However, because you used your exemption on your March 15,2005, home sale, and Internal Revenue Code 121 allows use of this tax breakonly once every 24 months, for you to qualify for the additional $250,000exemption the sale must close after March 16, 2007. For details, please consultyour tax adviser.

The new Robert Bruss special report, “Five Easy Ways toBuy Your Home and Investment Property for Nothing Down,” is available for$5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

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