Real Estate in Steamboat

DEAR BOB: I bought a rental property in 1991, which I sold for $450,000. To avoid capital gain tax, I used an Internal Revenue Code 1031 tax-deferred exchange to buy another rental property for $450,000. After renting it for 12 months, I moved in and have lived in it for 24 months. If I sell this property at the same $450,000 price, will I owe any capital gain tax since I made no profit? Is this a good way to avoid capital gain tax? –Sim Y.

DEAR SIM: Nice try! But Uncle Sam is way ahead of you.

Your adjusted-cost basis for the $450,000 rental house you acquired in an Internal Revenue Code 1031 tax-deferred exchange was not $450,000.

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Instead, it was your $450,000 purchase price minus the deferred capital gain on your old rental property minus the depreciation you deducted on the acquired property during the 12-month rental period before you moved in to make it your principal residence.

Although you owned and occupied the acquired property as your principal residence for the last 24 months, if you wish to claim the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a married couple filing jointly) you must own the acquired property at least 60 months before sale.

I hate to break the bad news, but the depreciation you deducted will be taxed at the special 25 percent federal “depreciation recapture” tax rate when you sell your current property. For full details, please consult your tax adviser.

HOME SELLER RENT-BACK MUST BE REPORTED ON TAX RETURNS

DEAR BOB: We recently bought a house and let the sellers rent it back for a month for which they paid us rent. Does this rent-back count as rental income on our income tax return? Does having them live in our house affect deducting mortgage interest for that month? –Robert R.

DEAR ROBERT: Your mortgage interest and property taxes are always tax-deductible.

However, the rent you received, because the rental term exceeded 14 days, must be reported on Schedule E of your federal income tax return where you can also deduct the applicable expenses for the rental period. Your tax adviser can give you more details.

LIFE ESTATE DOESN’T HAVE MUCH VALUE

DEAR BOB: My husband died about two years ago. He left me a life estate in his house. I am 68, but I want to move to Georgia to be near my children and grandkids. A neighbor offered me $1,000 for my life estate. Isn’t it worth much more than that since I am in excellent health and my family members live into their 80s and 90s? –Maida T.

DEAR MAIDA: Please read the exact terms of your life estate. Some life estates specify that if the life tenant permanently moves out, the life estate terminates. That means your life estate becomes worthless when you move out of the house.

However, if your life estate doesn’t terminate until you die, you can sell your life estate interest to the neighbor so he can rent or occupy the house. But that buyer shouldn’t pay very much because when you die, the life estate terminates.

Although you say your family members live into their 80s and 90s, you could get hit by a truck while crossing the street, thus terminating your life estate in the house. For full details, please consult a local real estate attorney.

The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” 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 Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

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

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Copyright 2006 Inman News

(This is Part 5 of a five-part series. See Part 1, Part 2 and Part 3 and Part 4.)

There are four more basic methods to consider when trying to avoid paying capital gains tax on the sale of your home.

METHOD #4 – INSTALLMENT SALES. Home sellers and realty investors often forget about this method of selling real estate without paying capital gains taxes (or at least deferring those taxes far into the future, or maybe never!). When a personal residence or investment property is owned free and clear without any mortgage, the seller is in an ideal situation to sell and carry back the mortgage financing for the buyer.

Purchase Bob Bruss reports online.

Offering easy financing is a great way for a property seller to get top dollar for the property. Equally important, the seller will then receive installment-sale income. If the seller doesn’t want to pay any capital gains taxes on the installment sale (which must be spread out with payments received in at least two tax years), secured by a first or second mortgage on the property sold, the installment-sale promissory note can be structured to be “interest only” payments from the buyer to the seller. That’s good for the buyer who makes minimal tax-deductible monthly payments to the seller. Of course, the interest income received is taxable as ordinary income to the seller-mortgage holder.

If there are no principal payments made to the installment-sale seller (except a minimal $1 in the year of the property sale, plus the principal balance due in a future year), all the seller’s principal remains busy earning interest income with no work on the investor’s part (except depositing the monthly interest checks).

In today’s low-interest-rate economy, a property seller can easily earn 5 percent to 6 percent or higher interest income on installment sales with the security of a mortgage or deed of trust on the property sold. If the buyer doesn’t make the monthly payments, the seller can foreclose and either get paid in full at the foreclosure sale or get the property back to resell for a second profit.

If the property seller dies while still holding the installment-sale mortgage on which there were no or few principal payments made, the capital gains tax which would have been due is forgiven by Uncle Sam. Of course, the installment-sale mortgage becomes an asset in the estate of the deceased mortgage holder who avoided paying capital gains tax.

METHOD #5 – TAX-FREE INVESTING WITHIN YOUR ROTH I.R.A. A great way to create tax-free income during realty ownership without capital gains tax when selling a property is to invest in real estate within your Roth IRA. If you have a regular IRA, or another retirement plan such as a 401(k) or 403(b), you can often “rollover” those assets, paying the tax, into your Roth IRA where you can buy investment real estate within your tax-free Roth IRA.

To do this, the Roth IRA must be set up to be self-directed with a trustee who allows real estate investments. For more information, good Web sites include www.entrustadmin.com (Entrust Administration), www.Sterling-trust.com (Sterling Trust Services), and www.midoh.com (Mid Ohio Securities). Entrust has an extensive Web site with lots of valuable information.

METHOD #6 – PRIVATE ANNUITY TRUSTS. This is a rather sophisticated tax- and estate-planning device that definitely requires the assistance of an experienced trust attorney. The basic idea is to create a private annuity trust that will be funded with assets, such as appreciated real estate, which is then exchanged tax-deferred for a private annuity contract to pay income to the investor. If you don’t need immediate income, the annuity income can be deferred to age 70½.

No tax will be due until income is received, such as from a commercial annuity purchased with proceeds from the sale of the appreciated real estate. In addition to the income advantage, a private annuity trust reduces the investor’s taxable estate and no tax is due upon transfer of the property into the trust because the tax is deferred, similar to an installment sale. For more information, a good Web site is www.PrivateAnnuityTrusts.com.

METHOD #7 – CHARITABLE REMAINDER TRUSTS. Another method of deferring and eliminating capital gains tax is to create a charitable remainder trust to support a favorite worthwhile charity. Not all charities have established procedures to accept real estate donations, which usually provide lifetime use and/or income to the donor. Most large universities and major charitable organizations, such as the Salvation Army and the American Cancer Society, welcome charitable remainder-trust donations. The possible disadvantage is it is an irrevocable trust, so once the asset is donated, the donor can’t revoke the donation due to changed personal circumstances.

SUMMARY: These four significant methods are excellent ways for avoiding payment of capital gains tax when disposing of your personal residence and/or investment real estate. Depending on your wishes, you can also create tax-free or taxable income for yourself and your family. Or you can donate your real estate assets to a favorite charity while enjoying property benefits and income during your lifetime. For full details on avoiding capital gains taxes when selling your home or investment property, please consult your personal tax adviser.

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

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Copyright 2006 Robert Bruss

NAPLES, Fla.–Perhaps some have visited Disneyworld, attended a conference in Orlando, Fla., or changed planes in Miami, but the vast majority of U.S. residents skip Florida and simply spend their leisure time closer to home. Winter has other draws too–snowbirds also head to Arizona, California and Mexico, or save their hard-earned dollars for a dream vacation to Hawaii.

You hear about Florida from friends, often those raised in the Midwest, whose parents retired to the Sunshine State years ago. And, it is important to stay in tune with Florida because it is still the most mentioned retirement state in the country. Yet lately, it seems to be home to tales of condominium “flipping” by gambling investors who turn over properties without any thought of occupying them and of thoughtless developers who have pulled every trick possible to plant the maximum number of units on a given piece of ground–regardless of the topography.

But there are also stories about developers and builders who conduct business the right way and actually establish a philosophy of land stewardship as part of a company culture, not merely as a one-time solution for obtaining the permits to exploit a problem parcel.

While large developers such as the Bonita Bay Group have taken heat simply for being big and catering to upscale baby boomers (it employs more than 1,500 individuals and is currently developing eight master-planned communities in southwest Florida), it also has been recognized for responsible and innovative development in preserving and enhancing the environmental integrity of its sites by the Urban Land Institute, Golf Digest and the Council for Sustainable Florida.

The original vision can be traced to the company’s founder, David Shakarian, who turned six “health food” stores in Pittsburgh–specializing in yogurt, honey and grains–into the multimillion-dollar chain of more than 4,800 General Nutrition Centers (GNC) featuring its own vitamin and mineral supplements as well as foods, beverages and cosmetics, in the United States and more than 35 foreign markets.

In 1979, Shakarian took the idea of a healthy living environment to southwest Florida where he had vacationed with his family. His goal was to create a community where wetlands were preserved, natural flowways restored and water-conservation efforts practiced to ensure the protection of precious resources. He started the Bonita Bay Group, which quickly established a reputation as the area’s most ecologically sensitive developer.

The first community was Bonita Bay, a 2,400-acre, master-planned community just north of Naples in Bonita Springs. Located on southwest Florida’s ecologically sensitive Gulf Coast, the property became the company’s flagship site and incorporates a range of delicate ecosystems, from fresh- and saltwater marshes to mangrove stands, a river and creek, and Estero Bay, which leads to the Gulf of Mexico.

“When he first bought that property, people thought he was absolutely crazy,” said David Lucas, a Harvard MBA graduate and Shakarian’s son-in-law who took over the family business when Shakarian died in 1984. “People said the property was too remote, too wet to develop and nobody would ever want to live there. It might have been in the middle of nowhere at the time with a lot of challenges, but he simply found a way to make it work.”

At build-out, in 2010, fewer than 3,300 residences will have been constructed, a significantly lower density than the 9,240 units approved in the master plan. More than 1,400 acres remain open space, including 230 acres of lakes, expansive nature preserve areas, and 12 miles of bicycle and walking paths. The off-site golf course, called Bonita Bay Club East, includes 895 acres of cypress wetlands, 190 acres of pine flats, lakes, hundreds of native sabal palms and open space. No residential development will ever occur on the golf course site.

Nancy Payton, a representative from the Florida Wildlife Federation, said her agency worked out an out-of-court settlement with the Bonita Bay Group when the company took over a trouble development in 2001.

“There were several lawsuits, and counter-lawsuits, with the previous developer over wildlife and wetlands issues,” Payton said. “The property had same sensitive issues yet the developer was reluctant to reduce the number and placement of housing units on the property.”

The lovely parcel was tied up in court for months with both sides spending tens of thousands of dollars on legal fees. Payton said she feared all of the players involved could run out of money before any significant progress was ever made in the case.

“The Bonita Bay people basically came and asked ‘what would be possible’ if they obtained title to the land. I was surprised because no developer had done that before. They eventually purchased the property from the original owner and worked with us to reach a fair solution.”

It seems like a logical, consistent way of “taking care” — from health food to preserving beautiful property.

Tom Kelly’s new book, “Real Estate for Boomers and Beyond,” (Kaplan Publishing) is now available at local retail outlets and on www.amazon.com.

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Copyright 2006 Tom Kelly

DEAR BOB: I would like to buy a second home in Phoenix, but all my money is tied up in retirement accounts. I am thinking a reverse mortgage will give me the money I need (about $250,000). Can I continue to live in my current residence? Are there annual fees for the reverse mortgage? –Roger D.

DEAR ROGER: I presume you are 62 or older. Fannie Mae offers reverse mortgages for home purchase. However, the residence acquired must become your principal residence and you must make a substantial down payment. The big advantage, however, is no monthly payments as long as you live in the acquired home.

Purchase Bob Bruss reports online.

If you want to keep your current principal residence where you plan to spend most of your time, you can obtain a “lump sum” reverse mortgage. The exact amount available depends on your age (the older the better) and your home’s current market value.

The reverse mortgage lender doesn’t care how you spend the money. To find a reputable local reverse mortgage originator, I suggest you go on the Internet to www.reversemortgage.org to learn how much you can obtain secured by your current residence. More details are in my special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.bobbruss.com.

PARTIAL TAX EXEMPTION FOR HOME SELLER

DEAR BOB: In 2004 my wife accepted a job in Seattle. We bought a house for her to live in there, but we kept our former residence where I remained. She lived in the Seattle house for 10 months before accepting a new position that allowed her to return to living with me in our home. When we sell the Seattle house, can we exclude the capital gain from tax on 10/24 of the $250,000 we would have been eligible for if she lived in the house for 24 months? –Chuck V.

DEAR CHUCK: Yes. From your description, it seems your wife qualifies for 10/24 of the $250,000 principal residence sale exemption of Internal Revenue Code 121 for the profitable sale of the Seattle house. For full details, please consult your tax adviser.

PRICE, NOT UNITS, DETERMINES TAX-DEFERRED EXCHANGE

DEAR BOB: I read your real estate section every week. Thank you for the valuable information. If we were to sell our two-bedroom rental house and buy a multi-unit dwelling out of state, will that qualify for an Internal Revenue Code 1031 tax-deferred exchange if the house we sell is more expensive than the units we acquire? –Theresa W.

DEAR THERSA: It’s not “my” real estate section, but I enjoy contributing to it every week. To qualify for an Internal Revenue Code 1031 tax-deferred exchange, you must trade equal or up in both price and equity. The number of rental units is irrelevant.

The exchange you describe is a taxable “down trade” because you will be taking out taxable “boot,” such as cash or net mortgage relief. Also, you will be exposing yourself to the dreaded special 25 percent federal tax rate for “depreciation recapture.” Please consult your tax adviser for details.

The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” 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 Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

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

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Copyright 2006 Inman News

In 1988, Jennifer and Terral Croft divorced. The court awarded Jennifer use of the jointly owned family home and ordered Terral to pay child support for their children.

But Terral was not faithful in making child support payments. In 1992, the state court entered judgments against him for the accruing unpaid child support payments.

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In 1996, the Internal Revenue Service filed and recorded a federal tax lien for $73,857 in unpaid federal taxes against Terral.

In 2004, Jennifer obtained a judgment against Terral for $131,495 for unpaid child support payments. The court granted her an equitable lien against Terral’s half-interest in the house.

She then filed this lawsuit against the IRS, alleging her interest in Terral’s half of the house was superior to the IRS tax lien that was recorded in 1996.

The IRS argued that because its tax lien was recorded in 1996 against Terral, under the “first in time, first in right” rule, the $73,857 tax lien has priority over Jennifer’s 2004 $131,495 judgment for unpaid child support payment.

If you were the judge, would you rule the 1996 IRS tax lien has priority over Jennifer’s 2004 judgment as to Terral’s 50 percent interest in the house?

The judge said yes!

“The Federal Tax Lien Act creates a lien in favor of the United States upon ‘all property or rights to property, whether real or personal’ belonging to any person who neglects or refuses to pay any tax after demand,” the judge began.

“Once a taxpayer’s interest in property is established and a federal tax lien arises, however, federal law governs the priority of competing liens,” he explained.

“In other words, as to these interest holders, the ‘first in time, first in right’ priority applies,” the judge emphasized.

“By her petition, plaintiff claims an equitable entitlement to monies owed to her by Mr. Croft dating to July 6, 1988, the date that the final judgment of dissolution of marriage was entered, and Mr. Croft’s support obligation was created,” he continued.

However, she was not a judgment lien creditor in the marital residence by reason of the divorce decree and, at the earliest, she did not obtain a recorded final judgment until April 6, 2004, the judge emphasized.

Since the IRS tax lien attached to Mr. Croft’s one-half interest in the residence in 1996, the tax lien was first in time so it is superior to the plaintiff’s equitable lien for unpaid child support in the property, the judge ruled.

Based on the 2005 U.S. District Court decision in Croft v. U.S., 2006-1 USTC 50105.

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

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Copyright 2006 Inman News

Q: I live in an older home. I think it was built about 1930. It’s two stories and has a masonry fireplace in the ground-floor living room. The home has natural-gas central heating and a gas water heater. The fireplace is wood burning and I enjoy sitting in the living room in the winter in front of a fire.

Some friends installed a masonry fireplace in an addition they built to their home a few miles away. They included a gas starter when they had the fireplace built. I really like the convenience when they want to start a fire. No newspaper, no kindling — just push the button and light the fire.

I’d like to have a gas starter installed in my fireplace, but I’m a little apprehensive about adding it to the old system. What do you think? Should I go for it? What precautions should I take?

A: We think gas starters are a great idea. As you said, they take almost all the work out of building a fire — just push the button.

Of course, to get that convenience means you’ll have to provide electricity and a gas line to the fireplace. Retrofitting a gas starter to an existing fireplace is not a huge job, but it does come with some challenges and there are a few things you should be cautious about.

This project is not one for a do-it-yourselfer. Unless you are experienced working with wiring in older homes and you are comfortable fitting gas piping, this is a job better left to the pros.

While it’s true that Kevin ran the gas lines and Bill did all the wiring in Kevin’s home, we’d had a lot of experience with wiring and piping prior to taking on those jobs. Bill had the good fortune to befriend an electrician he’d hired for one of his projects who let him work along and showed him the ropes. Kevin spent three summers during his college days repairing and installing gas services for PG&E in Oakland, Calif.

In any event, whether you tackle the job or contract a professional, this job requires a permit and inspections by the city or county building inspector.

The electrical work is pretty straightforward. You’ll need to supply power through a switch to the starter. Usually you’ll be able to tap into an existing circuit, but if the circuits have the maximum number of receptacles allowed by the electrical code, you may have to install a new circuit breaker.

Your house is an older home, so it may have a fuse box instead of circuit breakers. If it does, this might be a good time to upgrade to a new service panel and convert the fuses to circuit breakers. Your electrician or the city inspector can guide you in this decision.

Running gas to the starter might be a little more problematic, mainly due to the age of the piping. Assuming the gas lines in the house are as old as the house itself, they are more than 70 years old. When working on a system this old, leaks at the joints are a real possibility.

Also, the pressure and size of the meter play a role in determining the volume of gas available to operate all of the gas appliances in the home.

Most early gas systems are undersized by today’s standards. To determine if you have sufficient pressure and volume to add the starter, give PG&E a call. They will be happy to send a service person to look at your service and gas lines to make sure the system will handle the additional load.

Make sure that whoever installs the gas line tests for leaks. The inspector will require a pressure test on any new piping that is installed.

Once the new line is fitted, but not connected to the existing lines, a pressure gauge is attached and air is pumped into the line to a pressure of between 25 and 30 pounds. If the pressure holds for 24 hours, there is no leak and the installation is safe.

When the new line is connected to the old line, make sure all of the joints near the connection are tested with a solution of soapy water. Soap solution and the bubbles it produces will pinpoint leaks.

One final thought: Consider replacing the old gas lines themselves. While this is usually unnecessary, it might make sense if you are planning to update your heating system or you are considering a kitchen remodel with new gas appliances.

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Copyright 2006 Bill and Kevin Burnett

Dear Barry,

Our water heater and forced-air furnace are both installed on the same raised platform in our garage. Recently, the water heater began leaking and had to be replaced. Our main concern, however, involves the water that leaked into the platform and the adjacent wall. The enclosed space below the platform is part of the duct system for the furnace, and we’re worried about the long-term effects of this moisture. It seems strange that the joint use of the platform would ever have been allowed, considering the potential for mold and other moisture-related problems. Is it OK merely to repair the leak, or should the platform be opened up to promote more thorough drying? –Lisa

Dear Lisa,

Water heaters and forced-air furnaces are commonly installed side-by-side on raised platforms in garages. The potential for moisture-related problems should be obvious when these installations are made, but in most cases, little or no thought is given to the inevitability of eventual water heater leakage. The obvious solution is so simple and inexpensive that one can only wonder why it is seldom practiced. All that is needed is an overflow pan (commonly known as a “Smitty pan”) installed under the water heater, with a drainpipe to convey water from the pan to the exterior of the building or at least to the garage floor.

In most cases, the raised platform serves as a passageway, known as a plenum, for the air that re-circulates from the house to the furnace. If the interior of the plenum becomes wet, mold or fungus can develop, and this can adversely affect air quality within the home. Therefore, immediate steps should be taken to promote rapid drying of the platform as soon as water leakage occurs. To do this, the furnace blower should be operated, along with additional fans in the garage. For professional assistance, there are companies that specialize in moisture removal and water damage mitigation.

Once the plenum has been dried, an inspection of its interior by a qualified mold specialist would be a wise precaution.

Dear Barry,

Our fireplace is equipped with natural gas to help ignite the logs. Is there any requirement to keep the damper open in case of a gas leak? –Nicole

Dear Nicole,

Dampers must be fastened in the open position when fireplaces are set up with gas-log systems (that is, cement logs). With wood-burning fireplaces, this requirement does not apply. The reason for securing the damper is not to protect against gas leakage, but to prevent combustion exhaust from venting into the house. Natural gas has a commonly recognized odor. Occupants would typically notice gas leakage from a log lighter. Exhaust from burnt gas, on the other hand, can go undetected and therefore constitutes a more significant hazard, especially because exhaust from gas logs may contain carbon monoxide.

In older homes, gas logs may have been installed prior to the requirement to secure or remove the damper. In those cases, a special clamp can be added to the damper as a safety upgrade.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.

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Copyright 2006 Barry Stone

DEAR BOB: My fiance and I are splitting after a 10-year relationship. During this time, we bought two single-family houses and one duplex. When we started acquiring these properties, my credit was poor due to a bankruptcy, so all the property is in her name. I am worried that nothing is in my name. What should I do to protect myself and my interest in these properties, which have greatly appreciated in market value? –Dan C.

DEAR DAN: Please consult the best real estate attorney in town. Unless you have some type of written agreement, you might find it very difficult to prove an oral agreement to co-own the properties and split the profits upon sale. Now is the time to determine your exact legal rights in the properties, if any.

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It might be necessary to bring a legal action for a “declaratory judgment” asking the court to determine your legal rights. Your real estate attorney will probably recommend recording a “lis pendens” against the property titles to prevent their sale or refinance pending the outcome of the lawsuit.

Hopefully, you will be able to work out a fair settlement so legal action does not become necessary. Your situation is a classic example why it is so important to put everything in writing, especially because the Statute of Frauds requires written agreements for real estate contracts.

DETERMINING BASIS IN PROPERTY GIFT FROM DEAD DONOR ISN’T EASY

DEAR BOB: About 15 years ago, my dad deeded a vacant lot to me. He then built a modest house on that lot and I have rented it to my aunt ever since. My dad died about five years and my aunt died recently so I have decided to sell the property. How do I determine my basis and my capital gains? –Amy P.

DEAR AMY: It may be possible to determine from public records your late father’s purchase price for the lot. However, the amount spent to build the house on the lot will be more difficult, unless there was a construction loan or mortgage used to pay the cost. Fortunately, the Internal Revenue Service allows owners in situations like yours to make reasonable cost estimates.

From the adjusted-cost basis, I presume you deducted depreciation during the years you rented the house to your aunt. When you sell the house, this depreciation deduction will be taxed at the special 25 percent federal “recapture” tax rate. For full details, please consult your tax adviser.

IS A BROKER “TRANSACTION FEE” LEGAL?

DEAR BOB: As a home seller who paid my listing broker a 5 percent sales commission (split equally with the buyer’s broker who obtained the buyer), I was very upset when, at the closing, my broker demanded I pay a $395 “administration fee.” She said this is “standard” now. Because I wanted to get the sale closed, I stupidly agreed to pay. However, when I re-read my listing contract, I didn’t see anything about a $395 administration fee. I later talked with several other realty agents I know and they said they don’t charge such fees on top of a sales commission. Is this junk fee legal? –Brian K.

DEAR BRIAN: Real estate brokerage owners are well compensated from sales commissions. If you did not agree to pay the $395 administration junk fee, on top of your sales commission, as part of the listing contract, you should not have to pay.

I suggest you send a written demand letter to the broker insisting the $395 be refunded within 10 business days. If you fail to receive the $395, I would take the broker to local small claims court for breach of contract and fraud because you were not obligated to pay.

The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” 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 Internet delivery at www.bobbruss.com. Questions for this column are welcome at either address.

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

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

If you or your parents are nearing retirement age and are considering a move to a new location, “50 Fabulous Places to Retire in America, Third Edition” by Arthur and Mary Griffith is a great place to start your quest. The authors list their top 50 favorite retirement spots, followed by six pages to explain the pros and cons of each town.

As you might expect, the list is weighted toward the Sunbelt. But, surprisingly, three of the best-rated retirement havens are in Alaska. One is in Minnesota, and two are in Montana. The authors don’t say these are inexpensive places to retire; just that they are “fabulous.”

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At the end of the book, after describing all the 50 locations plus nine “honorable mention” towns, the authors finally reveal where they retired. I’ll give you some hints: median home price $112,400; population 5,332; closest big city 200 miles away; lots of privacy and scenery; great fishing and hunting; and a nickname, “The End of the Road.”

The reports for each retirement town follow a repetitive formula that includes the cost of living, climate, medical care, available housing and costs, recreation, services just for seniors, education resources, and transportation. Having visited most of the places described, I found the reports for each town remarkably complete, even including “nice-to-know” information, such as community special events and state car-registration rules.

For retirees who want to keep busy with full- or part-time employment, or perhaps start a business, each town description includes “earning a living” resources. Especially valuable are the latest unemployment statistics and growth information. There is also extensive real estate information for both house and condo buyers, as well as prospective renters.

If the book has a fault, it is that much of the statistical information is from 2003 and 2004, rather than more up-to-date 2005 information.

A strange feature of the book is the authors recommend a local real estate agent for most, but not all, towns. Readers can’t help but wonder how the individual realty agent was selected and whether there are any “referral fees” involved. A disclaimer explanation would have been useful.

But this isn’t a “chamber of commerce” book that reveals only favorable information about the 50 towns. The authors don’t hesitate to disclose negative information. Each town description includes crime-rate information, including whether the crime rate per 100,000 population is above or below the national average.

For example, a few weeks ago I visited Raleigh, N.C., which I thought was a very friendly, affordable and interesting city with lots of diversity. However, I was shocked to learn this “fabulous place” has a crime rate far above the national average and the violent crime rate is extremely high.

In addition to the 50 descriptions of each retirement town, there are three fascinating short chapters with lots of valuable information and suggestions for retirees. They are titled “Facts, Numbers, and Tips”; “Friendly Internet Websites”; and “Moving is: Worse than a Root Canal, but More Fun Than a Water Slide.”

After having visited all 50 fabulous retirement locations, you are probably wondering where retirement location experts Arthur and Mary Griffith live. The book cover shows a color photo of them enjoying an obviously summer day near Homer, Alaska, where they live on (unpaved) North Fork Road. On my scale of one to 10, this well-researched book earns a solid 10.

“50 Fabulous Places to Retire in America, Third Edition,” by Arthur and Mary Griffith (Career Press, Franklin Lakes, NJ), 2006, $24.99, 340 pages plus CD-ROM; available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

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

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

DEAR BOB: I will be getting married soon. My fiancé and I will be buying a home together and selling our current residences for capital gains exceeding the $250,000 exemptions for each. If we put ourselves on each other’s title, and file a joint tax return, can we take advantage of the $500,000 married exemption per property and avoid capital gains tax? If so, can we use the $500,000 exemption twice in the same tax year since both properties will be sold in 2006? –Wilamena P.

DEAR WILAMENA: Adding your name to the residence title owned by your fiancé, or vice versa, won’t change anything.

Purchase Bob Bruss reports online.

The reason is, to increase the principal residence sale tax exemption from $250,000 for a single owner to $500,000 for a married couple filing a joint tax return, both spouses must occupy the home at least 24 of the 60 months before its sale.

You can each sell your principal residences in the same tax year and claim up to $250,000 tax-free home-sale profit on each sale, thanks to Internal Revenue Code 121.

That’s presuming you each owned and occupied your home at least 24 of the 60 months before its sale. But you will owe capital gains tax, currently at the 15 percent maximum federal tax rate, plus state tax, on the capital gain exceeding $250,000. For full details, please consult your tax adviser.

UPSTAIRS CONDO OWNER’S NOISE IS A PRIVATE NUISANCE

DEAR BOB: I own a ground-floor condo, which I rent to a tenant. The resident owners of the unit above replaced their flooring with hardwood floors. My new tenant says the noise from the floors is intolerable and he wants to move out. With this noise problem, I am about to lose my tenant and I doubt I can even sell the condo if I disclose this noise problem to a buyer. I talked with the homeowner’s association. They advised that this is a problem between my neighbor and me. If I can’t work things out with my neighbor, do I have any recourse? This noisy floor is ruining my rental property. –Matthew D.

DEAR MATTHEW: The situation you describe is legally known as a “private nuisance” because it only affects one property owner. If it affected many owners, it would be a “public nuisance.”

If you can’t resolve the noise problem on a friendly basis with the inconsiderate upstairs neighbor, you may need to retain a real estate attorney to bring a private nuisance abatement lawsuit and sue for monetary damages.

NEIGHBOR LIABLE FOR DIVERTING WATER ONTO LOWER PROPERTY

DEAR BOB: About two years ago, my neighbor and I built a common cinderblock fence on our property line. She made additional improvements to her driveway on her side of the fence. Then she discovered her garage flooded with heavy rains. She rectified the problem by having the fence contractor punch a hole in the bottom of our fence to let the water drain into my yard. Now that part of my yard becomes a swamp when it rains. When I approached her about this problem she created, she said that is the natural way the water would run. She refuses to do anything. Is she right? Is her flooding my problem to fix? I am tempted to have the contractor come back to plug up that hole. –Katalin S.

DEAR KATALIN: The general rule is a lower property owner must accept the natural flow of water from an upper property owner. However, the upper owner cannot divert or channel water unto the lower property without liability.

Because you and your neighbor jointly built the cinderblock fence, it appears the rules of natural water flow no longer apply to your situation. Now your upper neighbor appears to be illegally directing or channeling the water onto your property.

Please consult a local real estate attorney to determine if “self-help” is appropriate by blocking that fence hole that directs water toward your property. Or perhaps you should file a lawsuit against your uncooperative neighbor to abate the private nuisance that she has created.

HOW LONG BEFORE OWNER-OCCUPANT CAN CLAIM $250,000 TAX BREAK?

DEAR BOB: After my rental property is converted to my principal residence, how long must I live in my house to qualify for the $250,000 tax-free from the sale? Some friends say two years, but others say five years. –Kimberly T.

DEAR KIMBERLY: If you acquired the rental residence in an Internal Revenue Code 1031 tax-deferred exchange, you must own the property at least 60 months before you can sell it and qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return.

Whether you acquired the rental house in a tax-deferred exchange or as a purchase, you must own and occupy it at least 24 of the 60 months before its sale to qualify for the IRC 121 exemption. For full details, please consult your tax adviser.

IS “BED-AND-BREAKFAST INN” A GOOD REALTY INVESTMENT?

DEAR BOB: My wife and I are thinking about selling our home, taking that $500,000 principal-residence-sale exemption you often discuss, and buying a small “bed and breakfast inn” where we have stayed many times. It has five bedrooms, plus an owner’s cottage in the back. Is this type of property a good investment? –Dan W.

DEAR DAN: A bed-and-breakfast inn is both a business and a real estate investment. Do you realize you will also be buying yourselves seven-day-a-week jobs? Please consider yourself fortunate if you earn much profit and if you eventually profitably resell.

I have some friends who owned a nice bed-and-breakfast inn in a resort area. The wife talked her husband into buying it. Only after moving in did they realize it was a full-time job (although they were able to hire outside help to give them a day off each week).

Due to a family situation a few years later they decided to sell. After the sale closed, the husband told me that was the happiest day of his life.

WHAT IF CO-SIGNER DEFAULTS ON HOME MORTGAGE?

DEAR BOB: A few years ago, my husband’s brother talked him into co-signing on a mortgage so the brother could buy a condominium. My husband had good credit and his brother did not. Since then, his brother has been in and out of jail, doesn’t work steadily, and my husband often has to pay all or part of the mortgage payments to prevent it from going into default. My husband wants his brother to sell the condo (which can be sold at a net profit of at least $75,000) but he refuses to sell. What can my husband do to get out of this mess? –Vivian R.

DEAR VIVIAN: Presuming he is a title co-owner, your husband can bring a partition lawsuit to force the sale of the property with the sales proceeds divided between the co-owners. He will need a real estate attorney to handle the legal details.

But before filing a partition lawsuit, if I were your husband I would sit down with the brother, explain the facts, and suggest they voluntarily agree to sell the condo without the costs of a partition lawsuit.

IS A “YIELD SPREAD PREMIUM” LEGAL?

DEAR BOB: I recently refinanced my home mortgage. I had to pay the mortgage broker a two-point loan fee. But at the closing settlement, the statement I received said there was a “yield spread premium” to the mortgage broker of $1,785. When I asked what this was for, I was told the lender paid my mortgage broker $1,785 on top of my two-point loan fee. Is this legal? –Miriam A.

DEAR MIRIAM: Yes. A “yield spread premium” fee is a legal kickback from the mortgage lender to your mortgage broker for producing a home loan with an interest rate higher than the lender requires.

For example, suppose the lender requires a 6 percent mortgage interest rate but you agreed with the mortgage broker to pay 6.25 percent interest. In addition to saying “thank you” to the mortgage broker, the lender paid a “yield spread premium” kickback fee to the mortgage broker.

When this occurs, often due to a decline in the mortgage market, many mortgage brokers will decrease the loan fee paid by the borrower. If you ask, perhaps your mortgage broker will refund part of the loan fee you paid him.

The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” 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 Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

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

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News