Investing in pre-construction home can be disastrous

DEAR BOB: About a year ago, I had an opportunity to buy intoa pre-construction, out-of-town development. I checked out the local market,which at that time was a “hot” seller’s market. So I invested a$25,000 deposit on a fourplex. Unfortunately, the developer was a crook whofiled Chapter 7 bankruptcy. Is there any way to get my $25,000 back? –Todd Y.

DEAR TODD: If you are a regular reader of this column, youknow I do not recommend investing in real estate that is more than an hour’sdrive from your home. The reason is then you can easily see, touch, smell, andwatch it.

Purchase Bob Bruss reports online.

You didn’t “invest” $25,000 in that out-of-townproject. You speculated when you turned over your $25,000 to the developer.

Some states, such as California, require pre-constructiondeposits be held in a trust or escrow account so the developer can’t use thosefunds. Apparently, that didn’t happen or the developer’s bankruptcy trusteewould have informed you.

What did you learn from this expensive lesson? (1) Don’tinvest out-of-town (2) with people you don’t know and (3) who control yourmoney. In the future, I suggest investing (not speculating) close to home whereyou can inspect the property before purchase.


DEAR BOB: Our house is owned under my living-trust name. IfI survive my husband, will the basis for the house be stepped up to marketvalue as of the date of his death? Should I add my husband’s living trust tothe deed? –Eliza W.

DEAR ELIZA: If the title to your house is in the name ofyour living trust and it is not a joint living trust with your husband, if hedies before you do, there’s nothing for you to inherit. Therefore, you won’treceive any stepped-up basis to market value on the date of his death.

However, if you and your husband have a joint living trustand he dies first, in a common-law state you will receive a new stepped-upbasis to market value for the 50 percent inherited from your husband. But ifthe residence is held in a community property state with both spouse names onthe living trust, if your husband dies first then you receive a new 100 percentstepped-up basis to market value.

For readers not familiar with the two major benefits ofholding real estate titles in your living trust they are (1) avoidance ofprobate costs and delays, and (2) management of the property by the successortrustee if the original trustor becomes incapacitated, such as with Alzheimer’sdisease or a severe stroke.

Please consult a local attorney who specializes in livingtrusts. It sounds like you need to change the title to your house to includeyour husband. More details are in my special report, “24 Key QuestionsAnswered: Living Trust Secrets Reveal How to Avoid Probate Costs andDelays,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA94010 or by credit card at 1-800-736-1736 or instant delivery at


DEAR BOB: My wife and I own a single-family rental housethat was severely damaged by an accidental fire caused by our tenant. The housewill have to be demolished and rebuilt. Our landlord insurance policy isexpected to pay both the costs of rebuilding and our rental income losses forup to 12 months after the fire. We realize the rental income will be taxable inthe years received. But what are the tax effects of receipt of the remaininginsurance proceeds to rebuild? –Peter R.

DEAR PETER: The situation you describe is an InternalRevenue Code 1033 involuntary conversion. You have up to two years after theend of the tax year in which the conversion loss occurred to either rebuild orreinvest the insurance proceeds tax-free in a similar use property.

If your loss exceeds the insurance proceeds, you may qualifyfor a casualty loss business deduction on the excess loss. For details, pleaseconsult your tax adviser.


DEAR BOB: My friend has a neighbor who plays very loud musicoutdoors. Because of a disability, my friend is severely affected by thevibrations. His homeowners association refuses to help. No other home is closeenough to be affected by the noise. Is this a “private nuisance” thatI have read about in your column? Does the fact he is disabled offer anyspecial recourse? –Stephen O.

DEAR STEPHEN: You are correct about this being a privatenuisance. Presumably your friend has politely asked the neighbor to keep thenoise down, but without results. His next recourse is a private nuisanceabatement lawsuit against the neighbor.

Your friend should consult a local real estate attorney fordetails. The disability doesn’t create any special legal advantage.


DEAR BOB: Is it worth cashing out my mutual funds (earningabout 5 percent) and my savings account (earning 4.25 percent) to pay off myhome equity credit line (HELOC), which is locked at 7.5 percent interest? Ilike the security of the mutual funds and having cash in a savings account. IfI decide to pay off my HELOC, I was told it is better to pay it off slowly oversix months rather than all at once. Is that true? –Brad K.

DEAR BRAD: Earning 4 percent to 5 percent (about 3 percentto 4 percent after taxes) interest income, and paying 7.5 interest (around 5percent after tax deductions) makes no sense. Pay off your HELOC.

If you need the funds for an emergency or home improvements,you can always write a check on your HELOC and borrow the money again. Itdoesn’t matter for your FICO (Fair Isaac Corp.) credit score whether you payoff the HELOC all at once or gradually. By paying off your HELOC, your FICOscore should improve.


DEAR BOB: My husband and I lived in our home for 22 monthsbefore selling it. He reads the tax law to mean that we get a tax exemption forthe time spent in our house. For example, if we lived in it 12 months, we wouldget 50 percent of the $500,000 exemption for a married couple. Is this corrector will we owe tax on our sale profit? –Michelle F.

DEAR MICHELLE: It’s a shame you didn’t wait to sell untilafter 24 months of ownership and occupancy to obtain the full $500,000 taxexemption.

Your husband conveniently misunderstood Internal RevenueCode 121. To qualify for a principal-residence-sale partial exemption, thereason for the sale must be one of those specified in the tax code and itsregulations.

What was your reason for selling your home after only 22months of ownership and occupancy? Was it due to a job location change, healthreasons, or “unforeseen circumstances” such as divorce, job loss,multiple births, etc?

If your reason for the early sale qualifies, then you may beeligible for a partial tax exemption up to 22/24 (11/12) of the $500,000exemption for a married couple (up to $250,000 for a single home seller).

However, if you sold your home for other reasons, such asmoving to a better neighborhood or a bigger house, then you don’t qualify for apartial exemption and your capital gain is fully taxable. For details, pleaseconsult your tax adviser.


DEAR BOB: We are in the process of trying to buy a housefrom a couple involved in a nasty divorce. They each have “streetfighter” divorce lawyers who use one tactic after another to delay thesale closing. Just when we get close to a closing date, it gets postponed. Thelatest tactic is we will only get two quitclaim deeds, one signed by theex-wife and one signed by the ex-husband. Is this dangerous for us? –Ryan T.

DEAR RYAN: No. Quitclaim deeds are very common in divorcesituations. Neither ex-spouse wants to make any warranties or representationsas to the condition of the property title.

Your best protection is to obtain an owner’s title insurancepolicy from a reputable title insurance company. Read it very carefully to becertain there are no liens or encumbrances you weren’t expecting. It isperfectly safe to accept a quitclaim deed if you also receive an owner’s titleinsurance policy.

The new Robert Bruss special report, “The 20 EssentialQuestions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’sMarket,” is now available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant internetdelivery at Questionsfor this column are welcome at either address.

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

Copyright 2006 Inman News

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