Real Estate in Steamboat

Don’t be misled, as I was, by the title “PropertyLadder Buying for Profit” by Kirsten Kemp. This new book is really aboutmaking profitable improvements to your home, whether you already own it or arepurchasing a “fixer upper” house to upgrade for fast profits orlong-term holding.

Although I have never seen or heard about the TV show”Property Ladder” on The Learning Channel, the first chapter containsfour case studies from episodes of that TV show.

Purchase Bob Bruss reports online.

These real-life examples explain how profitable improvementsadded market value to homes. The before-and-after color photos are amazing andinspiring. Profits on the four houses range from $74,000 to $104,000, as shownby home values before and after fix-up. Fix-up costs ranged from $30,000 to$62,000; the number of construction weeks averaged about nine.

Author Kirsten Kemp explains in considerable detail justabout every possible improvement a home might need and how to accomplish it.Unfortunately, after the book’s first few pages there are no more color photos,just drawings, to illustrate the topics under discussion. But the superbgraphics and two-color printing make for easy reading and understanding.

“Make renovations that pay off” is the book’stheme. Judging from the color photos, the goal is to transform an ugly houseinto a near-model home even though all the houses pictured were at least 30years old.

Emphasis is on kitchens and bathrooms, but bedrooms are notoverlooked, although the upgrades are less extensive, such as installing crownmolding and upgrading the flooring.

Especially valuable are the details on improvementalternatives, where to get the best prices, and how to save. For example, whendiscussing granite kitchen countertops, Kemp explains, “Bypass kitchenshops and big-box retailers and go straight to the granite yard to selectslabs.” She also says, “Don’t be shy about bargaining with thegranite-yard salesperson. Find the granite you like best, inspect the slabs forcracks or fissures, and ask, ‘What’s the best deal you can give me?’ “

Throughout the book there are more details than you mightwant to know, but it pays to read those details to compare upgrade choices. Toillustrate, in the section about flooring, the author compares hardwood, tile,laminate floors, and carpets, including nylon, olefin, polyester, acrylic, wooland blends. She also explains the importance of installing new carpet paddingand the type to install.

The practical information and advice is amazing. This is thekind of book to first read lightly without getting bogged down on the details.Then, after knowing what valuable information the book contains, it pays to goback to re-read the details about the topics which especially interest you.

The section on paint is especially valuable. Having improvedmany houses and dealt with paints and stains of all types, I thought I knewabout paint. Wrong! Since paint is the most profitable home improvement by far,I was pleasantly surprised by all the new paint facts I learned. Especiallyvaluable is the information when you can and shouldn’t paint over oil paintwith latex, and vice versa.

Although there are only four major chapters — “CaseStudies”; “All Around the House”; “Makeover Magic”;and “Project Price Guide” — don’t be misled. Within each chapter arekey topics, explained room by room, as well as by projects, such aslandscaping, lighting, cabinet doors, sinks and faucets, crown molding, andstrategies.

The price guide is especially valuable because it comparesseveral quality grades. To illustrate, it shows the difference in qualitybetween a $500 and a $3,300 refrigerator. This valuable guidebook is easy tounderstand as it emphasizes the most profitable home upgrades to consider. Onmy scale of one to 10, it rates a solid 10.

“Property Ladder Buying for Profit,” by KirstenKemp (Meredith Corporation, Des Moines, IA), 2006, $19.95, 249 pages; availablein 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 2007 Inman News

DEAR BOB: I plan to sell my home in the next few months. Is it wise to have a professional home inspector prepare a report before I list my house for sale so I can use his findings to help establish the sales price? One Realtor tells me I should not have the report made because if buyers rely only on his report, then I am liable if the inspector misses something. The Realtor says home buyers in my area usually will not have their own inspection done if I had one available and therefore I am taking on more liability. What is your opinion? –Mary B.

DEAR MARY: I strongly disagree with that Realtor. Every home seller should have a pre-listing professional home inspection, as well as other customary local inspections, such as for termites, dry rot, energy efficiency, building-code compliance, etc.

Purchase Bob Bruss reports online.

Then you will know the condition of your home and if it has any serious defects you should repair before listing the home for sale. Savvy home buyers always have their own professional inspections. Unless asked, you don’t even have to show your inspection reports obtained before listing. Buyers should be encouraged to hire their own inspector after you have accepted their purchase offer.

After you have obtained the inspections and decided to either repair defects or disclose them to prospective buyers, be sure to interview at least three successful local real estate agents who sell homes in your vicinity.

Each agent interviewed should prepare a written CMA (comparative market analysis). This form shows recent sales prices of nearby homes like yours, asking prices of similar neighborhood homes (your competition), and even recently expired competitive listings (usually overpriced).

The CMA form also shows each agent’s recommended asking price and probable sales price for your home. Only after you have at least three CMAs are you ready to select the best agent to get your home sold.

TAX-DEFERRED TRADE MEANS YOU CAN’T TAKE OUT ANY CASH

DEAR BOB: I plan to sell my home and move out of state to a lower-cost area. I have about $300,000 profit in a rental property on which I want to do a 1035 exchange. At the new location, comparable properties are worth about $250,000, so I plan to trade for two properties. Must I transfer all my profits from the 1035 exchange to the new properties, or can I finance the properties with a new mortgage and pull out some of the profits? How soon after making the 1035 exchange can I convert one rental property into my personal residence? –Pete R.

DEAR PETE: It’s called an Internal Revenue Code 1031 (not 1035) tax-deferred exchange. All the properties must be held for investment or use in a trade or business. Your personal residence is not eligible.

To qualify for such a trade, often called a “Starker exchange,” you must trade equal or up on both total price and equity. That means you can’t take out any taxable “boot,” such as cash without owing capital gain tax on that “unlike kind” personal property.

Yes, you can trade up one property for two (or more) properties, as long as you meet the basic test of exchanging equal or up on both total cost and equity. That means you can’t receive any net mortgage relief or put cash in your pocket.

However, after the tax-deferred exchange is completed, you can refinance the acquired properties to take out tax-free cash.

IRC 1031 does not say how long an acquired property must be held as a rental before converting it to your personal residence, but most tax advisers suggest renting it for at least six to 12 months before converting. Ask your tax adviser for further details.

WHAT TYPE OF PROOF IS REQUIRED FOR $250,000 HOME-SALE EXEMPTION?

DEAR BOB: I have seen endless mentions in your articles about living in your principal residence at least two of the last five years before its sale to qualify for that $250,000 tax exemption (up to $500,000 for a qualified married couple). But what proof does the IRS require if they question eligibility? How does the seller prove it was the primary residence? –Susan C.

DEAR SUSAN: Unless the home seller is audited, the IRS does not require any proof the Internal Revenue Code 121 principal-residence-sale requirements were met. If you qualify for the full exemption, up to $250,000 for a single principal-residence seller, or up to $500,000 for a qualified married couple filing a joint tax return, you don’t even report your principal-residence sale on your income tax returns.

If the IRS should question your eligibility, you will need proof the home was your principal residence. Evidence could include utility bills, voter registration, driver’s license, filing income tax returns from your principal residence sold, bank accounts, and nearby employment.

HOW ARE PROFITS TAXED ON AN INHERITED HOUSE?

DEAR BOB: Two sisters, both over 72, inherit a house. Their dad purchased it in 1964 for $30,000. It is now worth $750,000. If they sell it before they die, what is the rate of capital gains tax? –Gregory D.

DEAR GREGORY: The adjusted cost basis of the house for the two sisters (their ages are irrelevant) was its “stepped-up basis” fair market value on the date of dad’s death. If they made any capital improvements during ownership, the improvement cost is added to this stepped-up basis.

When they sell the house for more than their basis, the excess is their taxable capital gain.

For example, suppose the house was worth $300,000 a few years ago when dad died. They added $100,000 of capital improvements during their ownership. Their basis is therefore $400,000. If they sell it for $750,000 net, presuming it is not their principal residence, they have a $350,000 taxable capital gain.

They will owe the current maximum long-term capital gain tax rate of 15 percent on their capital gain, plus applicable state tax where the house is located. For more details, they should consult their tax adviser.

BORROWER SAYS TAKE LENDER TO COURT OVER JUNK FEES

DEAR BOB: Unexpected mortgage junk fees seem to be a cruel surprise at the closing settlement, imposed after all the emotional investment in a new house has been made by the borrowers. Sitting at the closing table, with the prospect of losing your new house, makes it almost impossible to walk away and not pay the lender’s junk fees. It seems the mortgage lender’s “good faith estimate” given to the borrower earlier is worthless and unenforceable. But what about another approach? Could the borrower pay the junk fees and then sue the lender in local Small Claims Court for a refund? Has this approach been used successfully? –Walter L.

DEAR WALTER: For readers not familiar with mortgage junk fees, they are charges imposed on borrowers by the lender for services that do not provide a specific borrower benefit.

Junk fee examples include underwriting fee, administration fee, warehouse fee, documentation fee, loan review fee, preparation fee, and other names dreamed up by lenders. Examples of legitimate non-junk mortgage fees for specific services include appraisal fee, title insurance fee, attorney or escrow fee, and credit report fee.

Small Claims Court decisions don’t get publicly reported so there is no way to know your chance of success. It’s worth a try, but be sure to make clear in writing at the closing you are paying the lender’s previously undisclosed last-minute junk fees under duress.

REAL ESTATE VERBAL AGREEMENTS MEAN NOTHING

DEAR BOB: We rented a house on a one-year lease based on the rental property manager’s promise to landscape the backyard. But we failed to put it in writing. The manager promised to have it installed by Oct. 1. It is now January and we still have just dirt in the back yard. He says he’s a man of his word “where a handshake still means something.” But the owner can’t afford to put in the landscaping now. We’re tired of dirt and rocks in our back yard. Can we break our lease? –Ron F.

DEAR RON: In real estate, verbal agreements mean nothing. You should have obtained that landscaping promise in writing, signed by the owner (not just the property manager).

If you break the lease, due to failure of consideration, and the landlord takes you to court, it is up to the judge to decide if you were justified.

However, when a tenant breaks a lease, the owner has a duty to mitigate damages by attempting to re-rent. At worst, you probably would only be liable for a few months of rent while the house is vacant. For more details, please consult a local real estate attorney.

The new Robert Bruss special report, “The 10 Key Questions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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 2007 Inman News

2006 wasthe year that the national housing market slowed. However, what happens on thenational level doesn’t necessarily translate to local markets, which vary considerablyfrom one another.

In someareas, the housing market started looking like a normal market in 2006. Inother areas, it became a buyer’s market. Some areas, such as El Paso, Texas, and Salt Lake City, Utah, defied the national trend and showed sizable home-priceincreases in 2006. 

No oneknows for sure where the market will go from here. For areas where appreciationin recent years has been strong, the best-case scenario is that home priceswill advance in the low single-digit range for perhaps several years. Theworst-case prognosis for the hot market areas of 2004 and 2005 is that pricesmight drop before they rise again.

Buyers whoare buying in a soft market and who are not prepared to stay put and ride out apossible downturn should reconsider buying at this time. But, if you buy nowfor the long term, you could be well positioned for the next wave ofappreciation.

HOUSEHUNTING TIP: Regardless of where you’re buying, the game plan is basically thesame. First, carefully evaluate your financing options before you startshopping for homes.

One-hundred-percentfinancing and interest-only mortgages have become popular in recent years,particularly with first-time buyers. With both of these types of financing, youdon’t build equity in your home when prices are flat unless you makeimprovements that increase the property’s value or you pay down the principalbalance. So, if you were to sell after years of zero or less appreciation, youcould end up paying out of pocket to close the sale.

This doesn’tmean that you shouldn’t use this type of financing. Just make sure that youunderstand the pros and cons of any of the mortgage options available to you.While you’re educating yourself about financing, get preapproved for themortgage you’ll need to complete a purchase. You are in a better position tonegotiate with sellers if they’re convinced that you are financially capable ofclosing the sale.

The nextstep is to learn as much as possible about local market values. This meanslooking at a lot of property until you understand why one listing sold for$20,000 or $50,000 more than another. Your agent can help you with thiseducation process by providing you with information about new listings, pendingsales, closed sales and expired or withdrawn listings that didn’t sell. The Internetis also an invaluable source of information about the housing market.

To be asuccessful home buyer in any market, you need an agent who has intimateknowledge of the local area, is a good communicator and is skilled at negotiation.In a hot market where home prices are escalating, you want an agent who cancounsel you on how to win in a multiple offer situation.

In a softermarket, you’re main concern is buying a property that will hold its value.

Not allhomes are equal. Some properties hold their value better than others. Aknowledgeable and ethical real estate agent will tell you whether a home you’reinterested in will be a good investment. A good resource for an agentrecommendation is an acquaintance who bought or sold recently, and who had apositive experience.

Also, in aslower, more normalized market, home sale transactions often take time to puttogether and more time to work through contingencies. Good communication andnegotiation skills are a must, as is patience and perseverance.

THECLOSING: Choose an agent who is up to the challenge.

DianHymer is author of “House Hunting, The Take-Along Workbook for HomeBuyers” and “Starting Out, The Complete Home Buyer’s Guide,”Chronicle Books.

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Copyright 2007 Dian Hymer

Weakhousing markets appear to encourage mortgage fraud. Typically, fraud associatedwith home purchases requires multiple perpetrators, one of whom is theringleader. While a lender is always the victim, another lender may be involvedas a perpetrator. An appraiser, home seller and home buyer are always involved,perhaps innocently, perhaps not.

Here is agreat example provided by one of my readers. He had his house listed for salefor six months with no takers at the list price of $700K, reduced from over$800K, and finally took it off the market. Shortly thereafter, he received aletter offering him $675K, contingent on his getting an appraisal for $750K.(The letter-writer was the ringleader in this case.) The homeowner did get anappraisal for $750K, perhaps because of his high asking price earlier, and thetendency for appraisals to lag the market.

Theringleader explained to the homeowner how the deal would go down. The criticalfactor was 100 percent financing for the full amount of the appraisal. Of the$750K obtained from the lender, $675K would go to the seller, $20K tosettlement costs, $20K to the ringleader, and $35K to help the buyer with thepayments.

One majorelement in the fraud is concealment of the true price, which is $675K. Thestandard lending rule is that the loan amount is based on appraised value orsale price, whichever is lower. Hence, the sales contract and loan documentshave to show a $750K sale price, which makes it a fraud.

Theringleader trolls for buyers with ads that do not mention price or loan amount,only monthly payment. The advertised payment, furthermore, is below the monthlymortgage payment on the $750K loan by the amount of the ringleader’s monthlycontributions from the $35K, which has been extracted from the sale price forthat purpose.

Who in hisright mind would borrow $750K to purchase a house worth $675K? Only those whoare payment myopic, meaning that they make purchase decisions based on monthlypayment rather than price. There are many, especially among first-time homebuyers, most of whom have been paying rent for their housing. In makingdecisions about renting, it is appropriate to compare the quality of theaccommodation with the monthly rent, and many carry that mindset over to homepurchase, not realizing that home ownership is a different game altogether.

On theface of it, these borrowers should not qualify. They are putting no cash in thetransaction — even the settlement costs are paid for them — and they canafford the payment only with the help of the supplement paid by the ringleader.How does the ringleader find a lender who will qualify them?

I don’tknow the answer, but my speculation is that the lenders who originate theseloans are co-perpetrators who knowingly accept falsified documents. They don’thold the loans, and therefore don’t take the risk of default and foreclosure.The risk is passed first to wholesale lenders who buy the loans from theoriginator, and then to the ultimate holders, which are likely to be investorsin mortgage-backed securities and the entities that guarantee thesecurities. 

Loanoriginators who sell loans in the secondary market can be required torepurchase loans that quickly go into default. Usually these buybackarrangements don’t extend more than six months; however, beyond that theoriginator is off the hook.

In thecase at hand, the ringleader protects the lender against buybacks by selectingborrowers who can carry the payment with the help of the supplement. So long asthe supplement lasts, which will be one to two years, the likelihood of defaultis low. When the supplement stops, the default probability will jump, but thatis no longer viewed as the responsibility of the loan originator.

This is atempting deal for home sellers who are having trouble getting their price. Whena sale is consummated, they get their money and are out of it. Because theysign off on falsified documents, however, they are participants in fraud.

It is alsotempting for buyers who see an opportunity to acquire more house, perhaps farmore, than they could otherwise afford. The down side is that they must also signoff on falsified documents, and they risk defaulting on the mortgage.

Buyerswill default after the supplement ends unless either a) their income rises tothe point where they can carry the payments on their own, or b) the houseappreciates enough that they can sell at a price that covers the mortgage. Adefault would seriously damage their credit and delay any plans to becomehomeowners legitimately.

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

Copyright 2007 Jack Guttentag

Long-termrates are clinging to their highs (6.25 percent for mortgages, 4.77 percent forthe 10-year T-note), but the bond market looks lousy, poised for another rise.

Thestraight-line, quarter-percent rise in rates began in the second week ofDecember, as data began to arrive too strong to support sweet dreams of a Fedrate cut, especially strength in the job market. Unemployment is a dead-low 4.5percent, and a sustained decline in new claims for unemployment insurance saysthat conditions are, if anything, improving.

The Fed’sJanuary “beige book” describes the labor market as “tight,”competition developing for scarce types of training and talent, and in thestage historically leading to wage pressure in excess of productivity.Wage-induced inflation is the worst form, quenchable only by racking up theunemployment rate — which is not difficult to do, except that politicians willthen filet and fricassee the perpetrator at the Fed.

So far,the tight labor market is just a threat, but there is no way that the Fed willease in its presence. Year-over-year core inflation has drifted down from 2.9percent to 2.6 percent, but that’s a long way from the 2 percent top of theFed’s target zone. Yes, oil falling to fifty bucks is good news for inflation,but it’s nothing more than a balance to the harm in ’05 and ’06 — volatilityin energy prices is the reason that markets watch core inflation instead ofoverall.

The restof the beige book is quite different. All through 2006, the Fed’s descriptiveand predictive word was “moderate” (both noun and verb); this beigebook switched to “modest” to describe most of the economy. I don’tknow if modest is weaker than moderate, but it is not stronger, and the reportfrankly described housing as softer than the worst-is-over types would have it,and the same for vehicle sales and production.

Down oneline of argument, the job market is always the last to slow in a slowdown, andthe Fed, stuck at 5.25 percent to prevent wage inflation, will ultimately makethings worse. Recession still ahead.

Downanother road, the housing bubble is no more hazard than Y2K, and the economyhas rapidly adjusted to 5.25 percent — after all, about the same Fed fundsrate prevailing from 1995 to 1999, one of the hottest, most productive andinflation-free intervals ever.

At thisinstant the bond market is leaning to road two, but my hunch is that there isno single fork ahead, but successive bouts of indecision. Reasons as follows:

1. Any bigrise in mortgage rates from here is going to be self-correcting.Adjustable-mortgage rate re-sets could be doing real harm (they’re all headedfor 7.5 percent or more right now), but cheap fixed-rate loans are an easy andattractive escape hatch. There is no question that the drop in fixed rates from7 percent to 6 percent from July to December softened the housing blow, and are-trace upward would hit hard.

2. I donot now, nor have I ever believed in a housing bubble — not in the sense of awidespread collapse in prices by 20 percent or more. However, announcementsthat the corner has been turned are unfounded optimism. The worst is not overwhen the market reaches a flat-price bottom, the worst begins then: flat pricesover time expose more and more mistakes and bad luck, numbers often rising foryears. The corner is restored appreciation of prices, and many coastal areasand the Desert Southwest are many years away.

3. PMIpublishes its estimate of risk of falling prices, and is a serious and skilledobserver (note that mortgage insurance providers have chosen to lose marketshare rather than join in the piggyback and subprime foolishness). Of 50 MSAs,PMI forecasts a 50 percent-plus probability of falling prices in 18, and a 30percent-plus probability in another eight. Housing risk ain’t over; it’s hardlybegun.

LouBarnes is a mortgage broker and nationally syndicated columnist based inBoulder, Colo. He can be reached at lbarnes@boulderwest.com.

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

Copyright 2007 Lou Barnes

(This is Part 2 of an eight-part series. Read Part 1.)

Taxpayers are entitled to claim deductions for theirprincipal residence and one vacation or second home. Except for unusualsituations, the ownership tax breaks for a primary residence are generallylimited to the mortgage interest and property tax deductions.

However, tax savings from owning a second or vacation homeare a bit more complicated and are often greater. Depending on yourpersonal-use time, and with some advance tax planning, your vacation or secondhome can produce significant tax savings.

Purchase Bob Bruss reports online.

FOUR TAX CATEGORIES FOR SECOND OR VACATION HOMES. Mortgageinterest and property tax payments for your second or vacation home are alwaystax-deductible. However, if you own a third home, it does not qualify for themortgage interest and property tax deductions unless it is a rental property.

Your personal use time determines which of the four categoriesapply to your second or vacation home:

1. NO PERSONAL-USE TIME. If your second home wasrented or available for rental during all of 2006, with zero personal-use time,it is treated as rental property. Even if you occupied it a few days whilemaking repairs, your second home falls into this desirable category.

The tax result is your rental income and expenses arereported on Schedule E of your income tax returns. Don’t forget the non-cashdepreciation deduction for wear, tear and obsolescence, which can result insubstantial tax savings, either in the current tax year or”suspended” for use in a future tax year.

Applicable deductible expenses in this category includemortgage interest, property taxes, insurance, homeowner association fees,utility bills you paid, repairs, and depreciation. You can also deductreasonable “ordinary and necessary” travel expenses to inspect (butnot occupy) your rental property, even it is in such remote hardship locationsas the U.S. Virgin Islands, Puerto Rico, or Hawaii.

When you hire a professional property manager to rentvacancies and collect rents, to claim the deductions specified above you must”materially participate” in managing your second home. That means itcannot be in a “rental pool” managed by others and you must own atleast a 10 percent interest in the property.

Material participation includes setting standards fortenants, establishing the rent and approving tenants, even if the day-to-daymanagement is left to others.

If you materially participate in managing your second-homerental and if your 2006 adjusted gross income is $100,000 or less, then you candeduct up to $25,000 of second-home tax loss from your other ordinary taxableincome.

If your adjusted gross income is between $100,000 and$150,000, then your second-home tax loss gradually phases out. Above $150,000adjusted gross income, you cannot claim any second-home tax loss.

But the good news is any unused tax loss exceeding the$25,000 limit can be “suspended” for use in a future tax year or whenthe property is sold to offset taxable gains.

However, if you are a “real estate professional”spending at least 750 hours annually on your real estate activities, then youcan claim unlimited deductions from your rental property from your ordinaryincome. One spouse can qualify and need not hold a realty license, even if theother spouse works full-time elsewhere.

2. LESS THAN 14 DAYS OF ANNUAL RENTAL. If yourent your second or vacation home less than 14 days per year, in this taxcategory you can deduct your mortgage interest, property taxes and anyuninsured casualty loss, such as water damage. But other expenses such asinsurance premiums and repair costs are not tax deductible.

In this category, if you rent your second home less than 14days per year, that rental income is completely tax-free and need not bereported on your income tax returns.

3. ANNUAL PERSONAL USE BELOW 15 DAYS OR 10 PERCENT OF THERENTAL DAYS. This is the most desirable tax category for a second home.There is no limit to your tax loss deductions against your ordinary taxableincome (except the $25,000 annual passive loss limit explained above). Rentalincome and deductible expenses are reported on Schedule E of your tax returns.

To illustrate, suppose you occupied your second home for12 days in 2006 and you rented it to tenants for four months in the summer (orwinter). Since your personal occupancy time was below 15 days per year, andbelow 10 percent of the rental days, you can deduct up to $25,000 of expenselosses exceeding the rental income, including depreciation, from your adjustedgross income not exceeding $100,000. But Internal Revenue Code 183 says youmust show a rental-activity profit at least three of every five years in thiscategory.

4. ANNUAL PERSONAL-USE TIME OVER 14 DAYS OR 10 PERCENT OFTHE RENTAL DAYS (IF RENTED MORE THAN 14 DAYS IN 2006). Thiscategory of heavy personal use and modest rental time results in the lowest taxsavings benefits.

Rental income must be reported on Schedule E, along with theapplicable rental expenses. However, in this category, any resulting tax losswhen rental expenses exceed the rent collected cannot be deducted againstordinary income from other sources, such as job salary. But unused losses are”suspended” for use in future tax years so keep track of these unusedtax losses.

The proper order for deducting second- or vacation-homeexpenses in this heavy personal-use category is mortgage interest, propertytaxes, uninsured casualty losses, operating expenses applicable to the rental periodsuch as insurance and repairs, and depreciation for the rental period.

If mortgage interest, property taxes and uninsuredcasualty loss expenses exceed the rental income, they become itemized personaldeductions on Schedule A of your tax returns.

CONCLUSION: Second or vacation homes are notgreat tax shelters, but they can save significant tax dollars while theproperty usually appreciates in market value for future resale profits.

A possible tax benefit, when you are thinking about sellingyour second or vacation home, is to move in to convert it to your full-timeprincipal residence for at least 24 of the last 60 months before its sale. Thenup to $250,000 principal-residence-sale capital gains will be tax-free (up to$500,000 for a qualified married couple filing joint tax returns in the year ofsale). Full details are available from your tax adviser.

Next week: Big tax savings for your residential movingcosts.

(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 2007 Inman News

Once upon a time, cabinets were site-built by the carpenters building the house. Today, in addition to the custom cabinets offered by cabinet shops, you can take advantage of the many lines of beautiful modular cabinets being offered by home centers, lumberyards, kitchen shops and other retailers.

Modular cabinets are individual pre-manufactured cabinets that are joined together to form a complete kitchen. You’ll find wall cabinets in different heights, base cabinets in every conceivable configuration, tall cabinets that span from the floor to the upper cabinets, and every type of trim piece, molding, filler and panel needed to complete the installation. Modular cabinets are now offered in an amazing array of styles, sizes, wood types, and stain and paint colors, along with an equally amazing selection of accessories. Whatever the size and architectural style of your home and no matter how you want to utilize your kitchen, you’ll find modular cabinets that will fit the bill.

MEASURE IT UP

The first step with any modular kitchen installation is to accurately measure the kitchen. This is something you can do yourself initially so that you can have some basic information to use when first meeting with the designer, but in order to ensure that your order is complete and accurate, most modular cabinet suppliers will then want to make a site visit and do more detailed measurements and layouts on their own. Also, if you have the store place your order off of your measurements, you’re typically stuck if the cabinets you specified are not the right size for the space. If they do the measurements, then it becomes their responsibility.

Make your measurements from drywall to drywall, since this is where the cabinets will be installed — measuring between rough framing can lead to errors. In addition to the overall size of the room and the length and height of each wall, you’ll want to make note of the centerline of windows and plumbing, the location of doors, and any other significant features of the room that will enter into the cabinet planning and layout. For ease of drawing, use graph paper with a convenient grid size.

With a basic sketch in hand, sit down with a modular cabinet specialist. You’ll want to begin your selection process by deciding on which cabinet line you want to work with, since different manufacturers have different sizes of cabinets and different accessories to select from. Since the overall appearance of the finished kitchen is the most important consideration, when choosing the cabinet line you like, first take into consideration the style of the cabinet and the woods and colors available. 

Next, take a close look at an actual sample of the cabinet, so you can see the level of quality and workmanship you can expect. You will find there are differences in the materials used — the amount of plywood, particleboard and solid lumber being the key factors — as well as the types of drawer slides, hinges, hardware, and even the assembly joints being employed.

When you’ve zeroed in a cabinet line you like, let the designer see if the cabinets that manufacturer offers are going to work with what you have in mind for your specific room before you get too far into the whole design process. If the cabinets you need to get the look you want are simply not available from that manufacturer, then switch to another line of cabinets.

Accessories are the next step. Cabinet manufacturers offer wine racks, spice holders, flour drawers, roll-out shelves — just about anything you can visualize for making your new kitchen really fit your lifestyle. Accessories can add a tremendous amount of convenience and functionality to your kitchen, but they can also add dramatically to the overall cost, so focus on those items you really need first. Also, some accessories can be added after the fact, so you might want to consider adding other things in the future as time and budget permit.

After the designer has made a site visit, measured the room, and discussed any design and layout options, he or she will work up a set of computerized drawings for you. It’s very important that you spend some time studying the layouts at this point, because this is the time to make changes to anything that doesn’t look or fit right. You will see a two-dimensional plan view of how the cabinets will lay out, as well as three-dimensional views from several different perspectives that will give you a much better idea of how the finished kitchen will look. 

The final stage is pricing and ordering. Your designer will provide you with a detailed breakdown of costs, including all accessories, delivery charges, and installation if desired. Make sure you fully understand exactly what has been specified and what will be ordered, as well as when and how the cabinets will be delivered to your site. This is a huge investment, so take the time now to review and understand your order so you can avoid any unpleasant surprises when that big truck shows up in your driveway!

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

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

Copyright 2007 Inman News

In the early 1930s, the Pennsylvania Railroad hired thefamed industrial designer Raymond Loewy to restyle its exceedingly uglyelectric locomotives. True to form, the Parisian-born Loewy came up with theGG-1, a stunningly fluid design sheathed in streamlined steel. The railroadgamely built a prototype, stitching it together with thousands of rivets in theusual manner of the time. When Loewy was first presented this real-lifeembodiment of his concept, he demanded in his strong French accent: “Whatare all those buttons?”

There’s a lesson here for people designing buildings aswell: Even a great design can be done in by the sort of unavoidable,nuts-and-bolts infrastructure items every building requires — visible pipes,wires, vents, flues, meters and what have you. As unsexy as they are, don’tfail to think through these kinds of details, don’t put them off to the lastminute, and never, ever leave them up to installers to figure out as they goalong. Here are some notorious examples:

• Gas meters, electric meters, and electrical entrancepanels — none of which are very lovely to look at — should be assigned to aspot that’s completely invisible from the street, ideally in a recessed orscreened area. Never place these items on the front of the building. Sincemeters are increasingly read remotely, access is less of an issue than it usedto be, but you should still check with your local utility for any restrictionson placement.

If necessary, run the remaining vents laterally so that theyexit the roof in a reasonably inconspicuous place. This extra effort will bedoubly worthwhile, since in addition to looking bad, plumbing vents are amongthe most likely spots for leaks to develop.

Oh, and about that streamlined locomotive: At RaymondLoewy’s insistence, all the subsequent examples of the GG-1 were built withsmooth, welded skins instead of being “buttoned” together withrivets. Today, it’s considered among the great industrial designs of all time.

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

Copyright 2007 Arrol Gellner

DEAR BOB: I am buying my first home in the next couple ofmonths from my aunt and mother. They’re inheriting my grandmother’s home, butneither of them wants to keep it. What is the best way to go about this familypurchase? –James M.

DEAR JAMES: Your aunt and mother first need to obtainmarketable title from your grandmother’s estate. This is very important. Thereason is their adjusted cost basis is the home’s market value on the date ofgrandmother’s death.

Purchase Bob Bruss reports online.

If they sell the house to you shortly thereafter, for thesame market value, they will owe zero capital gains tax.

Of course, as a prudent buyer, be sure a reputable realestate attorney or title company handles your purchase and you obtain anowner’s title insurance policy showing you acquired marketable title.

If the house is free and clear with no mortgage to be paidoff, you might ask your aunt and mother if they would like to finance yourmortgage so you don’t have to obtain a mortgage from an outside lender.

Because they know, trust and love you, they are likely tosay “yes.” Offer them a fair interest rate, which is perhaps 6percent in today’s market. That’s a great investment for them and easyfinancing for you.

By carrying back the mortgage for you, they will be creatingexcellent mortgage interest income for themselves, secured by the house. If youdefault, they can foreclose and get the house back to sell to someone else.

GET A PROFESSIONAL APPRAISAL FOR A DIVORCE BUY-OUT

DEAR BOB: My husband and I own a house worth about $375,000.It has a water seepage problem. We are in the process of a divorce and want tosell the home in the early spring. We are trying to fix the water problembefore then. But I am hoping to buy him out. How should I go about doing this?–Marian R.

DEAR MARIAN: Sorry, I can’t help you with that water seepageproblem. But divorce buy-outs by one spouse are very common. The first step isto get a professional appraisal of the house so you both can agree on thehome’s fair market value.

Be sure both parties agree on the selection of theappraiser. If that’s not possible, an alternative is for each spouse to hirehis/her own licensed appraiser and then average the two appraisals to arrive ata fair market value.

As for financing your buy-out of your husband’s share of theproperty, this is usually done by refinancing the mortgage (unless you havelots of spare cash!).

When agreeing on the buy-out amount, don’t forget to reducethe home’s market value by the amount of selling expenses that will be saved,such as the realty sales commission and transfer costs. Be sure your divorceattorneys review and approve the buy-out agreement.

TAX-DEFERRED EXCHANGE DOESN’T APPLY TO PERSONAL RESIDENCE

DEAR BOB: Within the next year, I want to sell my home andmove to a better climate. But my problem is I am single so I only will have a$250,000 tax-exemption. However, my estimated home sales price will be around$425,000. Can I use one of those tax-deferred exchanges you write about toavoid tax? –Carl T.

DEAR CARL: A tax-deferred exchange is appropriate for rentalproperties. But that is not your situation.

You left out a key fact. What is your adjusted cost basisfor the home?

That is usually your purchase price, plus most closing costsyou didn’t deduct in the year of purchase, plus capital improvement costs,minus any depreciation deducted, such as for business use of your home.Subtract your home’s adjusted cost basis from the net (adjusted) sales price toarrive at your capital gain.

For example, suppose $125,000 is your home’s adjusted costbasis and $400,000 is your net adjusted sales price after subtracting sellingcosts. The result is a $275,000 long-term capital gain (presuming you owned andoccupied your home at least 24 of the last 60 months before its sale).

Applying your $250,000 principal-residence-sale taxexemption, thanks to Internal Revenue Code 121, means you have only a $25,000 taxablecapital gain. At the current federal 15 percent maximum capital gain tax, plusapplicable state tax, that’s a genuine bargain. For more details, pleaseconsult your tax adviser.

The new Robert Bruss special report, “When It’s Smartto Prepay or Refinance Your Mortgage,” is now available for $5 from RobertBruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736or 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 2007 Inman News

Question: For eight years I have lived in afive-unit apartment that has very thin walls. The neighbor’s living area(kitchen and dining room) shares a common wall with my office, which is next tomy bedroom. A couple with a 4-year-old child moved in to this unit at thebeginning of the year. The husband works odd hours and the noise from them justwalking around as well as preparing meals has been waking me up at 10 p.m. or11 p.m., and sometimes meals are after midnight. Last night I received all ofthose wake-up calls in addition to loud noise from their unit at both 2:30 a.m.and 3:30 a.m. I have mentioned the noise to them a couple of times but to noavail. Past tenants and I have been able to work out the noise problem, butthey seem to feel that they can do as they please at any hour. What rights as atenant do I have when it comes to noise?

James McKinley,a lawyer for landlords, replies:

Noise is always anissue when people live in close proximity, especially in older buildings. Oncea tenant takes possession of the premises, he or she is entitled to peacefulpossession of the premises. The implied covenant of quiet enjoyment preventsthe landlord from disturbing your possession of the premises. In addition, alandlord’s failure to curb a tenant’s disruptive or abusive conduct might alsobe found to be a breach of the covenant of quiet enjoyment. In such a case, evictionof a troublesome or nuisance tenant is the best way to protect the othertenant’s right to quiet enjoyment of the premises. However, in this case, itdoesn’t sound like your neighbors are intentionally trying to be disruptive orabusive. Since you were unable to work out this problem with your neighbors,you should discuss the problem with your landlord. Most properties have quiethours before 8 a.m. and after 10 p.m. Your landlord should enforce these rules.It is unreasonable for you to be awakened at midnight, 2:30 a.m. and 3:30 a.m.If your neighbors are fighting, having parties or listening to loud music,etc., the landlord needs to warn them and evict them if the problems persist.On the other hand, your neighbors also have the right to quiet enjoyment oftheir premises. If they are waking you up by simply walking around in themiddle of the night, they aren’t doing anything wrong. In that case, you shouldask your landlord to add soundproofing materials to the shared wall. You’vebeen a tenant a long time, and your landlord might be willing to do this. Ifyour landlord is unwilling to do this, you always have the option to givenotice and move, or to invest in a set of earplugs.

Steven R.Kellman, a lawyer for tenants, replies:

The right to have aquiet and peaceful rental can easily collide with a neighbor’s right to doinnocent protected acts that make noise. For example, singing in the shower,running a juicer, watching television, having peaceful but slightly heatedarguments and caring for children are all lawful activities that make noise.This “normal” noise must generally be tolerated in multi-unithousing. Neighbors can, however, make too much noise or make enough noise thatit might be considered excessive for the time of day. When this happens, theline may be crossed where the noisemaking needs to be limited at some degree.In your case the noise isn’t necessarily excessive but occurs at thosesensitive hours (i.e. late evening and very early morning hours). As Jamespoints out, the neighboring tenants need to take extra care with their normalactivities that generate the kind of noise which may be much more noticeable atthose hours. His ideas of enforcing quiet hours, using noise-suppressingdevices such as earplugs and adding insulation are all viable options. The bestoption will always be common courtesy and cooperation. Again, in multifamilydwellings, this is necessary, as the tradeoff for lower rent is the acceptanceof close living. Those tenants unwilling to make the necessary compromisesreally need to think about relocating to a single-family dwelling where theywill pay for the ability to generate more noise (or live in a quieter home) inthe form of higher housing costs.

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, principal in a lawfirm representing 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 2007 Inman News