Real Estate in Steamboat

Whether you are a real estate “newbie” who wantsto learn the basic benefits, or an “old pro” who wants to learn advancedinvesting techniques, “Real Estate Advantages” by CPA Sharon Lechterand attorney Garrett Sutton offers something for every reader.

The book is organized into two sections. The first is aboutthe tax benefits of owning real estate. The second is about the legalstrategies, with an especially strong explanation of the best ways to holdtitle to investment property and why.

Purchase Bob Bruss reports online.

Just about everyone knows it’s a good idea to invest insound, well-located real estate. This new book explains why realty investingcan be so profitable, including the all-important tax benefits, which mostinvestors don’t fully understand.

Lechter and Sutton have a knack for simplifying thecomplicated, such as tax depreciation. Even savvy investors often don’t fullyunderstand depreciation is a paper loss or tax deduction, which doesn’t requireany out-of-pocket cash payment. Then the authors explain how the depreciationdeduction saves tax dollars, something investors often forget.

Although I didn’t agree with all the advice in the book,especially Lechter’s suggestion to use the local tax assessor’sland-to-building ratio when arriving at the depreciable value for an investmentbuilding, most of the suggestions are sound and profitable. Sutton’s advice onthe best ways to hold title to investment realty is especially thorough andeye-opening.

Heavy emphasis is placed on investors qualifying as a realestate professional to enjoy unlimited tax deductions from investmentproperties. When an investor can prove he or she spends at least 750 hours peryear on real estate activity, then unlimited investment property tax losses areallowed against other taxable income. If the investor doesn’t qualify, thenannual realty investment tax losses, usually from noncash depreciation is limitedto $25,000.

By use of a realistic example, Lechter explains how onespouse can have a high-income full-time job while the other spouse qualifies asa real estate professional spending at least 750 hours annually (about 14 hoursper week) on their realty investments. Holding a real estate license is notrequired to qualify nor must the qualifying spouse operate from a separateoffice.

The book is filled with profitable tips like that. Inaddition, the authors don’t hesitate to say what they think about current realestate trends. To illustrate, they warn how frequent “flipping” ofproperties, meaning selling shortly after acquisition, not only results in hightax rate taxation as ordinary income but it can also jeopardize the passive taxloss benefits of realty investing.

Lechter spends considerable time explaining the benefits andpossible pitfalls of Internal Revenue Code 1031 tax-deferred exchanges. Withoutbeing unduly technical, she emphasizes why it is so important that allqualifying investment properties in a trade be held in exactly the same namesand within the same tax returns.

An interesting extra bonus for readers is referral to theWeb site of the authors to learn about their “real estate bloopers.”This free audio download shares their true real estate stories “that couldhave had happier endings but provided valuable lessons.” That’s a nice wayof saying don’t make the same mistakes we made.

Chapter topics include “The Benefits of Leverage”;”Capital Gain vs. Cash Flow”; “Creating Your Real EstatePlan”; “Creating Your Team of Advisors”; “Setting Up YourBooks”; “Make Real Estate Your Business”; “Your PrincipalResidence”; “Vacation Homes”; “Real Estate and RetirementPlans”; “Using Pre-Tax Dollars to Buy Real Estate”; “ThreeExtra Tax Strategies”; “Homestead Exemptions”; “LandlordLiability”; “Insurance”; “How Not to Hold RealEstate”; “How to Hold Real Estate”; and “Asset ProtectionLessons.”

Every serious real estate investor should study the valuablecontent of this easy-to-read book because it simplifies the complicated toremind investors why real estate can be so profitable. The emphasis on both thetax and legal aspects of ownership make for enjoyable reading. On my scale ofone to 10, this excellent new book rates a solid 10.

“Real Estate Advantages,” by Sharon Lechter, CPA,and Garrett Sutton, Esq. (Warner Business Books, New York), 2007, $17.99, 239pages; Available in stock or by special order at local bookstores, publiclibraries, and www.Amazon.com.

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

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Copyright 2006 Inman News

There’s one thing that buyers and sellers agree on: homeinspections are no fun. Buyers and sellers hope for a good end result, butsomething invariably comes up.

To complicate matters, inspectors sometimes disagree on whatis wrong, what should be done to correct a problem or how much it will cost.Finding the right inspector isn’t always easy, but it’s often critical toresolving an issue.

A home inspector recently found a defect in a chimney. Herecommended that the fireplace not be used until the problem was corrected. Achimney contractor looked at the problem and said that fixing it was beyond hisarea of expertise.

The buyer’s agent suggested calling a second specialist whosaid he could repair the defect, but he was too busy to do the work before thetransaction closed. Furthermore, he wouldn’t be able to issue a firm bid forthe repair work without dismantling part of the chimney in order to access theproblem.

The sellers agreed to fix the problem, but they wereunwilling to sign a blank check. So the chimney contractor came up with acost-not-to-exceed price. The sellers agreed to leave enough money in an escrowaccount to cover the maximum cost for the repair work; any unused funds wouldbe returned to them after the work was completed.

This was a relatively easy solution. The sellers tookresponsibility for paying for the repairs. And, the buyers agreed to wait tohave the work done until after closing.

Not all inspection-related negotiations go so smoothly. Somesellers, particularly in the current market, feel that they sold for a bargainprice and don’t want to give up a penny more for anything.

Sellers who adopt a hard-line on inspection-related defects– particularly if the buyers didn’t know about the defects before they enteredin to contract — can sabotage the deal. With an increase in the number ofhomes for sale in many areas, it’s easier for buyers to find another house to buyif a deal doesn’t work out. And, they can usually wait if the right house isn’timmediately available.

HOUSE HUNTING TIP: You can best work out inspection-relatedissues by hiring a real estate agent before you get into contract to buy orsell a house. The agent should be a strong negotiator, resourceful and have agood track record for keeping transactions together.

If you don’t have past experience with an agent you’reconsidering, ask for references. Then, contact the references. Be sure to askif the buyer or seller felt well-represented during the inspection process. Askfor specific examples.

Open lines of communication facilitate working through theinspection process. Sellers often balk when they find out at the eleventh hourthat there is an issue. Rather than wait until the last minute to gathercritical information, start working on your due diligence as soon as your offeris accepted. Frequent conversations between the buyers’ and sellers’ agentsduring the inspection process can pave the way to a more successful resolutionto issues that arise.

Buyers can be understandably upset if they find out onlyafter their offer is accepted that the sellers neglected to disclose a materialfact. A material fact is anything that might be relevant to someone’s decisionto buy or the price he’d be willing to pay. Along with full disclosure upfront,presale inspection reports can be beneficial. Note that disclosure laws varyfrom state to state.

THE CLOSING: The more the buyers know about the propertybefore they make an offer, the less chance there is of a deal falling apart orof the sellers being sued later for failure to disclose.

Dian Hymer is author of “House Hunting, TheTake-Along Workbook for Home Buyers” and “Starting Out, The CompleteHome Buyer’s Guide,” Chronicle Books.

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Copyright 2006 Dian Hymer

“I went to a financial services seminar recentlywhere they were advising people to stop paying down the balance of theirmortgage by refinancing into an interest-only loan and then invest the cashflow savings in an indexed stock fund yielding 9 percent purchased throughthem. What do you think of this?”

I like ita little better than the usual prescription of investing the cash flow savings inannuities. However, some borrowers can’t do it profitably because their cost offunds is too high, and others shouldn’t do it because the risks are too great.

TheBest Case

Let’sassume you have a house worth $400,000, a 6 percent mortgage for $320,000, andyour investment strategy is to pay off the mortgage. The monthly payment onyour fully amortizing mortgage includes a principal component that reduces thebalance every month. That payment of principal, which rises every month as theinterest declines, is an investment that yields 6 percent with zero risk.

Analternative strategy is to convert the fully amortizing mortgage into one thatis interest-only (IO), investing the cash flow savings in an indexed stock fund– a fund that holds the same stocks as those in a major stock index, such asthe S&P 500. Since you will no longer be investing in mortgage repayment,this strategy is the same as borrowing at the mortgage cost in order to investin the index fund.

Since theindex is expected to yield about 9 percent over a long horizon, and assumingthe cost of funds is 6 percent, you will be earning a 3 percent spread, plustax benefits. The mortgage interest is deductible in the year paid, whereas amajor part of the return on the index fund will be capital gains on which thetax rate is lower, at least today, and payment is deferred. If all goes asplanned, you end up wealthier, even though you may never pay off your mortgage.

TheCost of Funds to Implement the Stock Investment Strategy

The best-casedescription above followed the practice of those marketing the plan of glossingover the cost of the funds invested in stocks. They assume, as I did above,that it is the rate on the refinanced mortgage, but that is wrong. If theborrower raises funds with a cash-out refinancing, the cost includes the lossof a lower-rate old mortgage (if there is one) that the borrower would haveenjoyed had he kept to his mortgage payoff strategy.

Forexample, a borrower recently wrote me that, at the urging of his broker, heplanned to raise $62,000 for investment by taking out a new mortgage for$200,000 at 6 percent, repaying the balance of $138,000 on his existing loan,which carried a rate of 4.75 percent. I told him that the cost of the $62,000that he would invest in stocks was not 6 percent but 8.78 percent, afteraccounting for the increase in rate on $138,000. He had to earn 8.78 percentjust to break even.

Similarly,if a borrower refinances into an interest-only loan in order to invest the cashflow savings in stocks, the cost of the cash flow includes the loss of thelower rate on the non-IO version of the mortgage that would have been used hadthe borrower pursued a mortgage payoff strategy.

Forexample, in a recent article I described a house purchaser who was consideringa 30-year fixed-rate IO at 6.375 percent rather than the non-IO version at 6.25percent, with the intention of investing the cash flow savings on the IO. Icalculated the cost of those savings at 8.35 percent, after accounting for thehigher rate on the IO.

If aborrower refinancing into an IO also has an existing mortgage with a low rate,the cost of funds could be well in excess of the return on stocks.

Riskand Market Volatility

Animportant factor to consider in assessing this investment strategy is whetheryou are comfortable with the risk. The expected return of 9 percent is based onexperience over long historical periods, it is not promised by anyone; theactual return could be lower or higher.

Furthermore,stock prices decline as well as rise. You have to be prepared to endure periodsof uncertain length during which your wealth will decline. It is not a strategyfor those with short time horizons or nervous stomachs.

If youdecide to go ahead, doing it on your own will avoid a host of transactionscosts. Find the best available refinance deal by following the suggestions onmy Web site, and find your own index fund. That is really easy to do, as youmerely select the fund with the lowest expense ratio.

Thewriter is professor of finance emeritus at the Wharton School of the Universityof Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Copyright 2006 Jack Guttentag

Dear Barry,

As a Realtor, I sell a lot of older homes with basementbedrooms. Sellers often can’t understand that these don’t comply as legal bedroomsbecause the high windows restrict fire escape. My question is this: When thehouse is sold “as is,” and the new buyers continue to use the illegalbedroom as such, is there liability for the sellers or Realtors in the event ofa fire. If so, what kind of disclosure should be made? –Frank

Dear Frank,

All you can do is provide full disclosure of noncompliancewith current fire safety standards, including the fact that the rooms cannot belegally used as bedrooms. If buyers choose to ignore such disclosure, theliability is their own.

Current building codes require bedroom windows to have sillsno higher than 44 inches above the floor. Additionally, window openings must beat least 5.7 square feet, with neither the height nor the width being less than24 inches.

Some basement windows can be upgraded to current standardsby constructing window wells at the exterior of the building. These areexcavated areas that are lined with concrete or masonry and provided with ameans of water drainage. Windows with lower sills could then be installed,enabling emergency escape by occupants. A person could simply crawl out intothe window well and then up to the exterior ground level. Disclosing thisoption to buyers would further limit liability in the event of a future fire.

Dear Barry,

Our home is less than 2 years old and has two mainproblems, but the builder won’t fix anything. The tile floor, installed on aconcrete slab, has cracked three times in the same place. Each time the tilesare replaced, the new ones crack within a few weeks. We also have two pocketdoors that won’t slide freely. If the builder won’t address these problems,what can we do? –Thomas

Dear Thomas,

Before communicating further with the builder, you shouldobtain a report from the most thorough and experienced home inspectoravailable. A competent inspector will discover more defects than you arecurrently aware of. Send a copy of the inspection report to your builder with aletter giving him X number of days to make repairs. Make it clear that afterthat time you will hire other contractors to complete the repairs and will holdhim responsible for the costs. Hopefully, the costs will not exceed the limitspecified for a small claims action.

When ceramic tiles on a concrete slab become cracked, theusual cause is common hairline cracking of the slab. Tile installers who doquality work laminate a slip sheet onto the slab surface before installing thetiles. This allows for slab movement at the cracks, without adversely affectingthe tiles. Recurrent cracks indicate that no slip sheet was installed. This isnot a code violation but rather an indication of mediocre workmanship.

Pocket doors that do not slide freely typically requireadjustments or repairs of a minor nature.

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

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Copyright 2006 Barry Stone

Are you a real estate “flipper” or a”keeper”? Most home buyers are keepers, owning their houses andcondos for five or more years. However, even as residential sales pricescurrently “stagnate” or “plateau” in most cities, accordingto the latest statistics from the National Association of Realtors and othersources, flippers continue to profit.

WHAT IS A REAL ESTATE FLIPPER? There isno official definition, but a real estate flipper is a buyer who acquires aproperty and holds title less than 12 months. Other names for property flippersare “quick turn specialists” and “speculators.”

Purchase Bob Bruss reports online.

“Buy low, sell high” is the motto of flippers.

There’s nothing wrong, illegal, immoral or fattening aboutthat. However, buying low and selling high isn’t always easy.

Real estate flippers usually must add value to earn profits.Not only do flippers buy 25 percent or more below the market value ofequivalent property in good condition, but they increase the purchasedproperty’s desirability by improving it to increase the value more than thecosts incurred.

The most profitable real estate example of adding more valuethan the improvement costs is fresh paint. Everybody has witnessed a shabbyrun-down house suddenly brought to life by exterior painting.

Although your results will vary, spending $1,000 on exteriorpaint of a house often produces $10,000 increased market value, sometimes more.Interior paint can produce similar profitable results.

SPECIAL TAX BREAK FOR OWNER-OCCUPANT FLIPPERS. If youenjoy tax-free income, consider becoming an owner-occupant flipper. That meansyou buy a house or condo, move in to make it your full-time principal residencefor at least 24 months, and then profitably resell it after making valuableimprovements that add more market value than they cost.

Thanks to Internal Revenue Code 121, yourprincipal-residence sale profit is then tax-free up to $250,000 (up to $500,000when both spouses meet the occupancy test and file a joint tax return in theyear of sale).

WHO SHOULD BECOME A REAL ESTATE FLIPPER? Flipperproperties are especially attractive to beginner real estate investors gettingstarted. Having earned substantial profits from fast-flip properties, I amaware the profits don’t always materialize as quickly as expected.

For this reason, especially for the first few properties, a”get rich slow” attitude is best. Later, after experience is gained,flipping properties becomes easier, perhaps even developing into a full-timeprofitable business.

Flippers are especially ideal for investors with a flare forspotting sound, well-located real estate in need of upgrading. When you see arun-down house and cry out “yuck,” you are a potential propertyflipper.

SECRETS OF PROFITABLE PROPERTY FLIPPERS. Althoughany type of property can be flipped, most flippers specialize in houses becausethey offer the best potential and the largest market of prospective buyers. Thesecrets of profitable property flips include:

1. Find a motivated seller who wants to sell due to anurgent reason and is willing to sell below market value in return for a quicksale. Strong seller motivations include out-of-town job transfers,unemployment, divorce, financial problems, illness, death in the family, andmoving to a better house.

2. Look for fix-up properties needing inexpensive cosmeticwork. “El dumpo” houses often just need fresh paint, new light fixtures,cleaning and minor repairs, new carpets and flooring, and fresh landscaping.

Examples of unprofitable but necessary fix-up work to avoidinclude structural changes, new roof and foundation repairs, which are veryexpensive but add little or no market value.

3. Search sources of “fast flip” properties,including real estate agents, newspaper classified ads, foreclosure sales,probate sales, bankruptcies, expired MLS (multiple listing service) listings,vacant rental houses, absentee out-of-town owner lists, and properties withunpaid property taxes.

4. Drive around desirable neighborhoods looking for vacant,run-down or abandoned houses. Jot down the address, take a digital photo toremember the house, and then check the owner’s mailing address at the taxcollector’s office to discover an owner who might be anxious to sell.

If you discover a house that has been owned for many years,often with a small or no mortgage and a large equity, that owner might beextremely eager to sell at a bargain price.

DISADVANTAGES OF FLIPPERS. But flipper properties,even when they produce large profits, are not without possible disadvantagessuch as:

1. Profits from the sale of investment properties heldless than 12 months are taxed at ordinary income tax rates. However, when aflipper holds title more than 12 months, then the sales profits are taxed atthe long-term capital gains tax rate, currently 15 percent or less, plusapplicable state tax.

Of course, if you own and occupy the property as yourprincipal residence more than 24 months within the last 60 months beforeselling, then your profit up to $250,000 (up to $500,000 for a qualifiedmarried couple) is completely tax-free. Home sellers who repeatedly sell theirhomes every 24 months are known as “serial home sellers.”

2. Some flippers don’t enjoy the work of fixing up propertyto add market value. Serious flippers quickly learn do-it-yourself work wastestime and money. The smartest flippers hire professional contractors. However,obtaining cost estimates and supervising workers can be time consuming.

The goal of every property flipper is to add at least $2 ofmarket value for each $1 spent on cosmetic improvements. Wise management canoften orchestrate improvements on a typical house to completion within 30 and 60days.

3. Fast flippers who sell quickly after completing theiradded-value improvements forfeit long-term market-value appreciation, which hasaveraged about 5 percent annually, according to the National Association ofRealtors. In recent years, this annual appreciation was even greater.

CONCLUSION: Flipping properties for resaleprofits is a great way to start investing in real estate. But flippers shouldbe aware of the pros and cons of this profit opportunity, including the incometax aspects of long- and short-term profits. A valuable resource is anexcellent new book, “Flipping Properties for Dummies,” by RalphRoberts, available in stock or by special order at local bookstores, publiclibraries, and www.Amazon.com.

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

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Copyright 2006 Inman News

During the cold winter months when the snow falls and thetemperatures remain low, a phenomenon known as ice damming can occur on yourroof. Left unchecked, ice damming can do substantial damage to both your roofand the interior of your home, so it pays to know what to look for and what todo about it.

Ice damming begins when snow piles up on the roof andoutside temperatures remain low enough that it doesn’t melt off from above. Atthe same time, heat being lost from inside the house begins to melt the snowfrom below. As the bottom of the snow layer melts, a thin film of water beginsto form between the top of the roofing and the underside of the snow. Thiswater runs down the top of the roof, beneath the snow, until it reaches theeaves.

Once at the eaves, the water is past the end of the attic,so no more heat is being lost from the house to keep the water warm enough toremain a liquid, allowing it to re-freeze into a solid dam of ice along theeaves. If the snow remains on the roof and the outside temperatures remainbelow freezing, the process will continue to repeat itself, and here is wherethe real danger starts. 

As water keeps running down the roof and hitting the icedam, it has no where to go but back up the roof, where it can work up under theshingles and lift and damage them as it freezes. When the outside temperatureseventually rise again, or when the ice dam gets over the heated portion of theattic once more, it melts. The water now has the opportunity to get inside thehouse, where it can cause a considerable amount of damage to the attic framing,the insulation and the drywall below.

WHAT TO LOOK FOR

Luckily, there are warning signs the alert you to theformation of an ice dam. One of the most obvious is icicles hanging over theedge of the roof, which indicate the melting and freezing cycle of the snow onthe roof and are often an indicator that an ice dam is forming. The larger theicicles, the larger the ice dam is above them.

You may also see smaller icicles coming out of eave vents,or even behind siding boards. This is an indication that water has now gotteninto the attic or has dripped down behind the siding, which typically indicatesa more severe problem. The appearance of water stains along the corner betweenthe ceiling and an exterior wall is another indicator that water has gotteninto the attic, wetting the insulation and making its way down to the drywall.

HOW TO PREVENT AN ICE DAM

Ice damming requires below-freezing outside temperatures, alayer of snow on the roof, and heat being lost from inside the house. There’snothing you can do about the temperature, but you can do something about boththe snow and the heat loss.

The first and most obvious solution is to be sure your atticis well insulated, so that heat remains inside the living space where itbelongs. Be sure that your attic is insulated to at least R-38 – about 14 to 17inches of blown fiberglass insulation – and that vaulted ceilings with no atticabove them are at or above R-30. Don’t overlook heating ducts running throughthe attic either. They can result in substantial heat loss, so make sure theyare insulated to R-11 or better.

Even with good insulation, a certain amount of heat is stilllost into the attic, so once it’s there you need to get rid of it. The mosteffective way of doing that, just like in the summer, is through good atticventilation. A combination of low vents under the eaves and high vents in thegable ends or along the ridge of the roof keeps a continuous flow of air movingthrough the attic, dissipating the waste heat before it can warm the roofsheathing and melt the snow above. Also, never intentionally block off attic vents,and be sure they remain clear when insulating.

Removing the snow layer also helps, since it allows sunlightto work on the ice layer below and melt it off. A snow rake, which is alightweight plastic or metal rake head attached to a series of long poles,allows you to drag snow off the lower portions of the roof from below, withoutthe danger of getting onto the roof to shovel it. Snow rakes are not effectiveon ice or hard snow, so rake it off while the snow is still soft and try toclear an area from the eaves up to about three feet past where the roof meetsthe exterior walls.

Heat cables installed on the roof near the eaves, once afairly common solution for melting off snow on the lower portion of the roof,has been proven to be ineffective. The cables are expensive to install andoperate, they can present a fire hazard, and the snow and ice will simplyre-freeze a short distance past the cables, leaving the ice-damming problemsstill in place.

When it’s time to re-roof your house, keep ice damming inmind. Shingles that are flat, uniform and adhere well to each other, such ascomposition shingles, form a better barrier against water intrusion thanirregular roofing such as wood shakes. Metal roofing, which has no horizontalseams, is virtually imperious to water intrusion from ice damming. Also,install a layer of rubberized ice and water barrier from the eaves up past theline where the exterior wall meets the roof. Ice and water barriers seal aroundthe fasteners and are very effective at keeping water out.

Remodelingand repair questions? E-mail Paul at paul2887@hughes.net.

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Copyright 2006 Inman News

China is a nation filled with ironies. It’s a purportedlysocialist state in which the images of Chairman Mao that used to gaze down frombuildings have been largely replaced by an equally paternal-looking ColonelSanders. And it’s an enormously proud culture, but one whose ideals of beauty– whether smiling women on shampoo bottles or virile men on packs of underwearor goo-gooing babies on diaper boxes — are most often depicted as Caucasian.

As for everyday Chinese life, forget those romantic imagesof rural schoolhouses, peasants tending rice paddies and ancient villages inthe clouds. Such scenes do exist, of course, and though they cater to ourlovely perception of China, they’re roughly as accurate as having modernAmerica represented by the shootout street in “High Noon.” 

In fact, most of China’s people are packed into a narrowband hugging the East Coast, and most of them live in relatively modern housingprojects. This trend is likely to continue as more and more people leave thecountryside for the comparative wealth of the urban centers.

What’s more, despite the bucolic images so dear toWesterners, few Chinese regret trading a rural lifestyle for an urban one. Formany, farmhouse life meant hauling the day’s water supply from the local wellin buckets, using a covered wooden pail for a toilet and heating bath water bythe kettleful on a charcoal fire. South of the Yangtze River, the climate wasnot considered harsh enough to require heating, so living in these warmerregions ironically meant occasional freezing temperatures indoors. My wife, whogrew up in this region, vividly recalls waking up on cold mornings to find thehousehold towels frozen solid.

Farmhouse living in summertime brought stifling heat andhumidity, along with flies, mosquitoes, and various other unwelcome critters inabundance — conditions that can make a clean, air-conditioned apartment withhot and cold running water seem more than a small step up.

While China’s highrise housing blocks may appear impersonalto Westerners, their design has improved dramatically in the past few years.Most are equal to our own, and the fancier ones have all the conveniences you’dfind in an American dwelling and then some: One well-to-do government officialI visited proudly showed off his Japanese-made toilet, an improbable lookingdevice bristling with electronic controls whose various functions I’d rathernot guess at.

Many rural customs curiously persist in this dazzling newurban setting. The Chinese still prefer to buy their meats and vegetables dailyfrom local farmers who set up stalls in the local market hall each morning.This points to another of China’s ironies: While vast portions of the nationare too arid to grow crops, it’s precisely China’s richest farmland — that ofthe coastal regions — that’s being consumed by development. Already, vastareas of prime farmland have been paved over with endless ranks of housing projects.

If building continues at this pace, where will the nation’sfood supply come from? And who will grow it after farmers have abandoned theland or been forced from it by development? America faced these same questionsat the end of the nineteenth century, when fully half of us still lived onfarms. Today, only two percent of us do, and we’ve not only survived, but alsoprospered under this trend. Given its ingenuity and determination, China maywell do the same.

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Copyright 2006 Arrol Gellner

DEAR BOB: My partner has owned his house for 22 years. Ihave lived in the same house for 12 years. We plan to sell the house next year.Are we eligible for the $500,000 principal-residence-sale tax exemption?–Ronald S.

DEAR RONALD: If your name is not on the deed, for federalincome tax purposes you are not a co-owner entitled to the $250,000 exemptionthat a principal-residence owner can claim thanks to Internal Revenue Code 121.Of course, that’s presuming the owner has owned and occupied the principalresidence at least 24 of the last 60 months before sale.

Purchase Bob Bruss reports online.

A qualified married couple filing a joint tax return in theyear of home sale can qualify for up to $500,000 tax-free principal-residencesale profits, but only one spouse’s name need be on the title. However, thereis no similar exemption for partners who are not married unless both names areon the title. For full details, please consult your tax adviser.

IF LIFE TENANT DOESN’T PAY EXPENSES, SHE CAN BE REMOVED

DEAR BOB: My stepmother has a life estate in the house whereshe and my late father lived together. After his death, his will provided alife estate for her. When she passes on, I am to receive the house. But she isletting the house run down badly. Each year I have to remind her to pay theproperty taxes. Last year the taxes fell in arrears and the property was almostlost at a tax sale before she reluctantly paid. She has plenty of money butfeels it is a waste to spend money on the house that I will receive when shedies. Do I have any recourse to end this nonsense that has been going on foryears? –Ben S.

DEAR BEN: The terms of the life estate control your rights.You are the “remainderman.” All you can do is be sure the life tenantpays the property taxes, insurance and mortgage interest so the property is notlost by default.

Your one legal ground to terminate the life estate otherthan for nonpayment of those expenses is to prove your stepmother is committing”waste.” That means she is not maintaining the house.

However, proving “waste” is extremely difficult sodon’t expect a judge to order the life estate forfeited for waste unless thehouse becomes extremely run-down.

EVEN BELOW-MARKET RENT MUST BE REPORTED ON SCHEDULE E

DEAR BOB: I own a condo that I rent to a mentally retardednephew at a very low rent. He receives disability income SSI checks and is ableto live alone. But he is not able to hold a job. Because the rent is so low, Iunderstand I cannot claim the normal rental property tax deductions such asdepreciation. Do I still have to report the low rent I receive? –Laura R.

DEAR LAURA: Yes. Rental income must be reported on ScheduleE of your income tax returns. When you file your income tax returns, you shouldlist all the applicable expenses such as for repairs, insurance, mortgageinterest, property taxes and depreciation.

However, because of the very low rent, you can’t claim anyloss deduction against your other ordinary taxable income. But the unused taxloss can be “suspended” for use in a future tax year. For details,please consult your tax adviser.

The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 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).

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Copyright 2006 Inman News

Question: My husband, 3-year-old daughter and I recentlymoved. My husband and I are smokers. The first night in our new apartment, thelandlord said she wasn’t aware that we were smokers, and asked that we notsmoke in the front room, which is the living room. My husband and I agreed notto smoke in the living room. The landlord informed us that she couldn’t smellthe smoke, as long as we weren’t smoking in the living room. After about amonth the landlord informed us that she doesn’t want smoking in the houseperiod. My husband and I informed her that we would not smoke in the frontroom, but that we would smoke anywhere else in the house we wished to. Becausewe stood up for ourselves and said there’s no law against smoking except inpublic places, we have been receiving letters from various lawyers saying wehave two weeks to stop smoking. I feel this is discrimination, what are ourrights?

Landlords’ attorney McKinley replies:

Unless a written lease or rental contract specifically prohibits smokingin the rental premises, you have the right to smoke in the property. That said,being a smoker is not a “protected class” such as race, nationalorigin, sex, sexual orientation, family status, etc., and landlords have theright to “discriminate” against smokers by refusing to allow smokingin rental property, or in the common areas. You did not say whether you rentedthe property under a fixed-term lease or on a month-to-month tenancy. If youare on a fixed-term lease, you don’t have to worry about anything. You cansmoke to your heart’s content, at least until the lease expires. However, ifyou are on a month-to-month tenancy, under California law, your landlord hasthe right to change the terms of the tenancy by giving you 30 days writtennotice. In other words, your landlord could amend the terms of your rentalcontract, by prohibiting smoking in the premises, after giving you 30 dayswritten notice.

Tenants’ attorney Kellman replies:

Since places to smoke cigarettes are becoming more and more restricted,the last place of refuge for the smoker is in the home. But even there, thesmoker is under attack. While smoking is a lawful activity, it still may belimited on private property by rules of the owner or on public property by alaw or regulation. The right to breathe clean air is making great stridesagainst the personal right to smoke. Landlords complain about property damagefrom cigarette smoke, the expense of cleaning up the litter and the fire hazardthat smoking causes. Also, nonsmoking neighbor tenants do not want to smell orbreathe the smoke or be subjected to the litter of smokers. Unfortunately forthose who choose to smoke, there does not appear to be any reason that alandlord cannot limit smoking at the property if done correctly. As McKinleycorrectly points out, “smokers” are not a protected class ofindividuals (like race and religion) so the traditional discrimination rules donot generally apply. As a smoker, you still have some protections. For example,if there are no lease rules against smoking and you stand up for your right tosmoke, then any eviction based on the lawful exercise of that right may be seenas retaliatory and illegal. Keep in mind that smoking that interferes with theother tenant’s use of the property may be restricted regardless of the lease.If your landlord wanted to impose a specific lease rule about smoking, he/shewould need to wait for a lease renewal, or the landlord could serve a 30-daynotice imposing new smoking prohibition rules on month-to-month tenants. Ofcourse, this will pose a challenging situation for those who find it difficultor impossible to quit smoking within 30 days.

Question: My friends and I have lived in the house weleased for one year. We’d been there for three months before the lady next doorgot sick of us and complained to the city about everything we did. Well, two tothree days after receiving a warning by mail, our landlord served us with alegal notice to terminate our tenancy in a matter of days for creating anuisance. That’s exactly what we did — we moved out and surrendered theproperty. Now he’s telling us we owe him the rent until someone else moves inand that we don’t get our deposit back. Is this legal, and if it is or isn’t,what should I proceed to do?

Tenants’ attorney Kellman replies:

This is an example of what is wrong with many legal notices, which donot mean what they appear to say. Your notice stated in what appeared to beclear language that you had a certain limited number of days to either move outand forfeit the lease or be sued for eviction. You chose to move out andforfeit the lease. Unfortunately, the forfeiture referred to in this notice didnot mean that the lease is canceled. It really means you forfeit your rights ofpossession under the lease and whatever defenses you may have had in that case,but the landlord keeps all theirs. In other words, moving out only avoided theeviction case but by doing so, you admitted liability for the claim against youand damages including possibly the balance of rent owed on the lease. Thisproblem also occurs in notices that demand you pay the rent or move out withinthree days. Same situation. If you do not pay and simply move, you againforfeit your defenses to the case and admit liability for what is claimed owed.The allegation of nuisance against you could have been disputed. If theneighbor could not prove significant nuisance behavior against you, you couldhave won the case and preserved your tenancy. Seek legal advice before takingaction on any such legal notice.

This column on issues confronting tenants andlandlords is written by property manager Robert Griswold, author of”Property Management for Dummies” and co-author of “Real EstateInvesting for Dummies,” and San Diego attorneys Steven R. Kellman,director of the Tenant’s Legal Center, and James McKinley, member of theMoffitt & Associates law firm, which represents landlords.

E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com.

Questions should be brief and cannot be answeredindividually.

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

Copyright 2006 Inman News

Real estate broker Hildegard Merrill was the listing agentfor a condominium. A licensed real estate agent since 1967 and a broker since1981, Merrill is very experienced with condominium sales, referring to herselfas the “condo queen.” She is also a mortgage broker.

John Warren visited Merrill’s condominium open house andexpressed an interest in buying the unit. With his permission, she checked hiscredit and found his FICO (Fair Isaac Corp.) score was very low. Warren toldMerrill he had only $50,000 for a down payment, but she agreed to loan him her$27,000 sales commission to make a 20 percent down payment.

Purchase Bob Bruss reports online.

When Warren said he didn’t have a co-borrower with a betterFICO score, Merrill suggested her daughter, Charmaine, would become a co-borrowerin return for $10,000. Warren agreed to the broker’s plan, and Merrill filledout her daughter’s loan application, showing Charmaine earned $7,500 monthly asa waitress in Aspen, Colo.

The mortgage was approved. Shortly before the closing,Merrill obtained Warren’s signature on an amendment to the sales contract tovest title to the condominium in Charmaine’s name alone. After the sale closed,Warren moved into the condominium. But Charmaine never signed the promisedquitclaim deed to Warren, even after he repaid the $27,000 borrowed fromHildegard Merrill.

Soon thereafter, Warren checked into the Betty Ford Centerin Palm Springs for substance abuse. He fell behind in the mortgage andcondominium fee payments, but Hildegard Merrill paid them to preventforeclosure.

She then obtained an eviction judgment against Warren,obtained a writ of possession, and evicted him from the condominium. When heleft the Betty Ford Center, Warren learned of his lock-out from thecondominium, which Merrill had since rented to tenants.

Warren then sued Hildegard Merrill for breach of fiduciaryduty and fraud, seeking quiet title to the condominium in his name, plusnon-economic and punitive damages.

If you were the judge would you award Warren title to thecondominium plus damages?

The judge said yes!

A real estate broker has a fiduciary duty as a trustee tohis/her client, the judge began. The evidence shows broker Hildegard Merrillviolated that duty and defrauded her buyer, John Warren, by misleading him, hecontinued.

By taking title to the condominium in her daughter’s namewith a promise to give Warren a quitclaim deed later and failing to deliverthat quitclaim deed even after he repaid the $27,000 borrowed from Merrill, shefraudulently violated her fiduciary duty, the judge explained.

“From the beginning of the transaction, she did notintend to perform her promise of placing his name on title,” the judgeemphasized. Therefore, imposition of a “constructive trust” isjustified to return the condominium to its rightful owner, John Warren, heruled.

Title to the condominium shall be quieted in Warren’s name,and non-economic damages of $15,000, plus $50,000 punitive damages, are imposedon broker Hildegard Merrill, the judge concluded.

Based on the 2006 California Court of Appeal decision in Warrenv. Merrill, 49 Cal.Rptr.3d 122.

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

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Copyright 2006 Inman News