Real Estate in Steamboat

“I am buying a house for $180,000, which I could payfor by selling assets, but everybody tells me to leave my assets alone and takeout a mortgage. Their advice makes me nervous because it is always based ongeneralities, such as ‘you want the mortgage as a tax shelter’ or ‘you shouldleave your investments alone.’ They don’t know anything about my tax status ormy investments. Is there a better way to make this decision?”

There is a better way. Use a spreadsheet called “Future Net Worth,”which can be downloaded from my Web site.

The spreadsheet allows you to measure your future net worthon the assumption that you pay all cash, then measure it again on theassumption that you take a mortgage, and see where you end up in each case. Thespreadsheet calculates your net worth year by year in both cases. I willillustrate the process, using my own assumptions, which will be simplified tomake the explanation easier to follow.

I assume you are purchasing a house for $180,000 and yournest egg also amounts to $180,000. You can use the nest egg to pay for the house,or you can leave it untouched and borrow the $180,000. (Of course, thespreadsheet also allows any combination in between, such as making a 20 percentdown payment from the nest egg and borrowing the balance.) The loan would be a30-year fixed-rate mortgage at 6 percent with a monthly payment of $1,079. Iassume that you have $1,500 of income on top of that available for investment.

Hence, if you take the mortgage, you have $180,000 plus$1,500 a month to invest. If you pay all cash, you have no lump sum to invest,but you do have $2,579 available every month, which is the $1,500 plus themortgage payment of $1,079 you wouldn’t be making. I assume you are in the 28percent tax bracket, which provides tax savings on the mortgage interest, and atax payment on the investment income.

The most important determinant of the outcome is the assumedrate of return on investment compared to the mortgage rate. For example, if youearn 6 percent on your investments, matching the rate you pay on the mortgage,your net wealth after 15 years is $831,602 if you borrow the $180,000, and$831,599 if you pay all cash. If the rates are the same, future wealth will bethe same — the trivial difference I found is a rounding error.

These numbers understate the actual wealth you would havebecause I have assumed zero property appreciation. Since the future value ofthe house will be the same regardless of how you finance the purchase,appreciation has no bearing on which mode of financing is better.

Now let’s assume that you can earn 9 percent on yourinvestments. This is a reasonable assumption if you invest in a diversifiedportfolio of common stock. It is an appropriate assumption if you are youngenough to have a long time horizon, and can maintain an equable disposition inthe face of short-run fluctuations in your wealth. On this assumption, yourwealth after 15 years would be approximately $1.05 million if you borrowcompared with $961,556 if you pay all cash.

Rule number one is simple: If the rate of return on yourinvestments exceeds the mortgage rate, borrowing leaves you better off thanpaying all cash.

Now let’s assume that you earn only 4 percent on yourinvestment. This is a reasonable assumption if you have an extremelyconservative investment policy, a relatively short time horizon, or both. Youhave guessed correctly that you will do better paying all cash in thissituation. After 15 years, your wealth would be $759,824, compared with$716,727 if you borrow.

But, there is an important proviso. My calculation assumesthat if you pay all cash for the house, you invest (at 4 percent) the $1,079per month you would have paid on the mortgage. If you spend it instead, yourwealth after 15 years will be only $517,211, or much less than if you hadborrowed, despite the fact that the borrowing rate exceeds the investment rate.The mortgage forces you to save whereas the all-cash strategy doesn’t.

Rule number two includes the proviso: If the rate of returnon your investments is less than the mortgage rate, paying all cash leaves youbetter off than borrowing, provided you save an amount every month equal to themortgage payment that you would have had following a mortgage strategy.

The writer is professor of finance emeritus at theWharton School of the University of Pennsylvania. Comments and questions can beleft 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

(This is Part 7 of an eight-part series. Read Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6.)

If you are among the millions of homeowners and renters whooperate a profitable part-time or full-time business from your home, don’tforget to claim your home-business tax deductions to reduce your income taxes.It doesn’t matter if you are self-employed or you are an employee expected towork from home, such as an outside salesperson or a telemarketer.

Purchase Bob Bruss reports online.

However, if your employer provides suitable workspace, butyou prefer working at home, then you don’t qualify for Uncle Sam’s generouswork-at-home tax deductions. For example, if you are a computer programmer whoprefers to work from home so you can supervise your pre-school child, you don’tqualify for home-business deductions if your employer provides suitable officeworkspace.

SELF-EMPLOYEDS MUST PASS THE PRIMARY BUSINESS LOCATION TEST. If youare self-employed, such as an independent contractor real estate sales broker,to qualify for the Internal Revenue Code 280A home-business tax deductions,your residence must be used either (1) to meet with clients, customers orpatients or (2) as your primary business location for administrative activityif you have no other fixed business location.

In 1999, Congress changed the tax law to allowself-employeds working from home to deduct business expenses if their residenceis their “primary business location.” Examples include aself-employed bookkeeper who travels to offices of her clients, a handyman whoworks at various job sites, and a computer repairman who works at many businessoffices during the week.

This tax law change was the result of the 1993 U.S. SupremeCourt decision denying anesthesiologist Dr. Nader Soliman (113 Sup.Ct. 701) anyhome-business tax deductions although he worked many hours at his condominiumreading professional medical journals and handling administrative details.Because he spent most of his work time at different hospitals, the court deniedhis home-business deductions. Today, however, he is entitled to deduct his homeoffice expenses because his condo is his primary business location.

WORK-AT-HOME EMPLOYEES HAVE A SPECIAL TEST. If youare a salaried employee working at home, the IRS imposes a special rule called”the convenience of the employer test.” You probably meet this testif your employer doesn’t provide suitable workspace, or expects you to workfrom home. Examples include outside salespeople, computer entry clerks andtelephone order takers.

PART-TIME BUSINESSES CAN QUALIFY. If youoperate a part-time business from your residence and you can meet the”primary business location” or “convenience of theemployer” tests above, then part of your home operating costs aretax-deductible.

To illustrate, suppose you operate a profitable part-timehome business selling books on the Internet about your passion, horse training.Or perhaps you sell Avon, Amway or Mary Kay products from your home where youhave an office and store inventory and supplies. Then you can qualify for thehome-business tax deduction.

But your home use must be a business, not a hobby orinvestment. For example, in the famous tax case of Joseph Moller (553 Fed.2d1071), he earned 98 percent of his income from his investment business. He wasa passive stock and bond investor operating from his living room. But the U.S.Court of Appeals denied Moller’s home-business deduction for investing which,the court said, was not a business.

However, the opposite result occurred in the U.S. Tax Courtdecision involving Dr. Edwin Curphey (73 T.C. 61). Dr. Curphey was a full-timedermatologist at a hospital. But he managed his rental properties on apart-time basis from his home office. The Tax Court ruled he was entitled toapplicable home-business deductions for his part-time property managementbusiness.

THE “EXCLUSIVE BUSINESS AREA” RULE. If yourfull-time or part-time home business meets the rules explained above, the nexttest requires an “exclusive business area,” which is not also usedfor personal or family purposes. But the exclusive business area need not be aseparate room.

Part of a room can qualify, but it cannot be shared use. Toillustrate, if you have your desk, filing cabinet and business supplies in onepart of the family room, that area can qualify. However, using your kitchentable to operate your part-time bookkeeping business, or occasionallyentertaining business clients in the living room clearly doesn’t qualify.

SQUARE FOOTAGE IS THE BASIS FOR HOME-BUSINESS DEDUCTIONS. Yourhome-business tax deductions are determined by the percentage of your home’ssquare footage that is used for the exclusive business area.

For example, suppose you own or rent a 1,500-square-foothouse or condo. One-third, or 500 square feet, is the “business area”where you keep your business supplies and have your office.

The result is 33 percent of applicable household expensesqualify as business tax deductions. If you are a renter, one-third of your rentis deductible on your business tax return. If you are a homeowner, one-third ofapplicable home expenses such as utilities, repairs, insurance, mortgageinterest and property taxes will be deductible on your business tax return, inthis example.

However, 100 percent of some expenses are fully deductible,such as your business telephone line (if you also have a personal telephoneline), business computer broadband fees, and painting or improvement costs forthe business area.

REMEMBER TO DEDUCT 100 PERCENT OF BUSINESS EQUIPMENT. If youpurchased business equipment and placed it in service in 2006, such as a newbusiness computer and software, 100 percent of that equipment cost isdeductible up to a maximum $108,000 deduction, with a maximum $25,000 deductionfor an SUV vehicle used in your business.

Higher equipment expense limits apply in an”enterprise zone” such as $208,000 in the Gulf Opportunity Zone.However, no deduction is available for personal assets converted to businessuse, such as a home computer bought in 2004 but converted to business use in2006.

DEPRECIATE YOUR HOME-BUSINESS AREA. If youown your house or condo, the exclusive business area is depreciable. Using theexample above, if your home-business area occupies 33 percent of your home’ssquare footage, then you can depreciate one-third of your residence’s costbasis (excluding nondepreciable land value) on a 39-year, commercial property,straight-line basis.

IRS Regulation 2002-142 says business use of your home won’taffect using the Internal Revenue Code 121 principal-residence-sale exclusionup to $250,000 ($500,000 for a married couple filing jointly). However, thetotal “business area” depreciation deducted must be”recaptured” and taxed when the home is sold using the special 25percent federal recapture tax rate.

HOME-BUSINESS USERS GET SPECIAL AUTO EXPENSE TAX BREAK. If youqualify for the home-business-use tax deduction, and you start your work dayfrom your home office, when you use your automobile or truck to visit customersor work locations, your business mileage becomes tax deductible the minute youdrive away from home.

For 2006, the business deduction is 44.5 cents per mile. Butyou must keep a daily log of business miles.

HOME-BUSINESS DEDUCTIONS CANNOT CREATE A TAX LOSS. However,home-business-expense deductions cannot create a tax loss.

That means your home-business deductions, when subtractedfrom your home-business profit, cannot create a tax loss against your otherordinary taxable income. But unused home-business losses can be carried forwardto future tax years.

To illustrate, if your business operating from your homeproduced a $2,500 profit in 2006, but your tax deductions for yourhome-business area are $3,200, only $2,500 can be deducted and the remaining$700 is carried over to a future tax year.

CONCLUSION: Whether you operate a full-timeor part-time business from your residence, and whether you are a homeowner or arenter, you can deduct applicable expenses to reduce your income taxes. Bothself-employeds and employees can qualify. For full details, please consult yourtax adviser.

SPECIAL REPORT AVAILABLE: Reprints of the entire”2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners andRealty Investors” are now available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010, or by credit card at 1-800-736-1736 or instant Internetdelivery at www.BobBruss.com.

Next week: the 10 most often overlooked realty tax breaks.

(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

If you’reremodeling or adding on to your home, one of the considerations you’ll befacing is how to heat that new space. Options abound, from individual wall heatersto radiant floor systems, but if your home already has a central heatingsystem, chances are that simply adding a new duct run to the existing systemwill be the easiest and most cost-effective choice.

A centralheating system is a very easy thing to visualize. A furnace uses electric coilsor the combustion of fuel to heat the air within it, and a fan then pushes thewarm air through a series of tubes, called ducts, into the individual rooms. Asthe fan pushes air out of the furnace, it also needs to draw more air in, so areturn duct is also provided within the heating system. The return duct pullsair from the house and directs it back to the furnace, where it is re-warmedand redistributed in an endless loop.

A furnaceand duct system is a carefully designed arrangement. The furnace needs to be ofsufficient size to heat all the air within a particular home, and the ductsneed to be large enough to deliver an adequate volume of air to each room. Ifthe duct going to one room is too small, the room won’t get enough heated airto sufficiently raise its temperature. If the duct is too large, the room mayget overheated, or the large duct may rob enough air from the rest of thesystem that the other ducts won’t have sufficient volume to heat their assignedrooms.

Thisrelationship between furnace size and duct size is known as balance. A properlybalanced system will operate more cost-effectively, and will provide adequateheat to each room without under- or overheating it. So, when considering theaddition of a new duct run, there are two things to keep in mind — furnacesize, and the size and layout of the duct system. For all but the very simplestof small duct extensions, you will typically need the help of an experiencedheating contractor to make all of the complex calculations required to size andbalance the system.

One of thefirst things the heating contractor will take into consideration is the overallenergy efficiency of the home, as well as the remodeled space. Homes with goodinsulation, good windows and doors, and a low amount of air infiltration issimply easier to heat, and as a result, the ducts serving each space can besmaller. Homes with poor energy efficiency require larger ducts to overcome theheat loss and keep the spaces sufficiently warm.

The nextconsideration is the furnace, which needs to be of sufficient size to providean adequate amount of heated air for the volume of the home and amount of heatit’s losing. If the furnace is large enough, then a new duct run can typicallybe added to the system pretty easily. If the furnace is too small, then youneed to either upgrade the size and/or efficiency of the furnace or improve thehome’s energy efficiency through better insulation, better windows, or othermeans.

Finally,you’ll need to determine how large of a duct will be needed for the new space,and where in the system the new duct will be inserted. An existing duct run maystart at the furnace with a 10″ diameter duct, then step down to 8″and then to 6″ as the duct runs branch off. Depending on the size of thearea you’re trying to heat and the distance away from the furnace, you may beable to extend a new duct right off the end of the 6″ duct, or you mayneed to go further back and tap into the 8″ or even the 10″ duct inorder to get sufficient air flow.

For longduct runs or runs that will serve a large area, such as handling a big roomaddition, you will usually need to go all the way back to the furnace itself tobegin the new run.  In this case, the newduct will be tapped into the furnace plenum — a large box attached directly tothe furnace that distributes air into the different duct runs — to ensure thatthe maximum amount of air volume is available for the new ducts.

Directingall that heated air into a new duct run will obviously rob air volume from theother runs, and here’s where you can run into some problems. A single smallduct run probably won’t have a huge effect on the system, but several largerones will. As the air flow is redirected, those rooms farthest from the furnacewill suffer the most, and in some cases the air flow will be reduced to thepoint of being inadequate to heat that space.

Adjustingand balancing all of these air flows to all of these different spaces can be atricky undertaking, requiring a knowledge of the amount of air being producedat the furnace, the size of the spaces being heated, the diameter of all theducts in the system, the total length of each of the duct runs, and the amountof heat loss. 

Under- oroversizing the duct runs can result in poor performance throughout the entiresystem and can put a lot of strain on the furnace, so these calculations are definitelybest left to the pros. Even if you would like to do the physical work ofinstalling the ducts yourself, plan on hiring an experienced heating company torun all of the airflow and heat loss calculations so you can be assured thatthe system will always be working at its best.

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

A hundredyears ago in the United States, most people shared small living quarters with onlya few rooms, and family members were constantly interacting with each other.This was still true at mid-century when millions of families moved out of thecities into single-family houses during the great suburban migration thatfollowed World War II.

Thoughthese new suburban houses had as many as five or six rooms, the overall size ofthe houses was small and everyone was still within “talking distance”of each other. Most families had only one phone that was invariably located ina central, public spot, so everybody in the household knew the weekend plans ofthe teenaged children. There was only one bathroom, so the household also hadplenty of contact in the morning before everyone scattered for school and work.

Over thelast 25 years, however, houses have gotten larger and larger. As a consequence,the constant family interactions that occurred in the past are not necessarilya central part of family life. The kitchen, living and dining spaces that wereseparate rooms are now merged into one space, which creates the opportunity forplenty of contact. But, the bigger houses also have plenty of other places forfamily members to spend time.

Forexample, most new houses today feature a capacious master suite that is oftenlarge enough to be characterized as a house within a house, or, as some wagshave suggested, a McMansion within a McMansion. The master suite usuallyincludes a sitting area for television viewing or computer work as well as theoccasional fireplace and kitchenette. The kids are off in their own bedrooms,often with their own attached bathroom and their own television and computer.After dinner, the family scatters. In many households, a family dinner is arare event.

While someprivacy, time for solitude and a space you can call your own is a good thing,spending time with family members is essential to the welfare of the household,and in the grand scheme of things, for society as well.

Why isthis?

The astuteobserver would say that the thousands of interactions between parents and theirchildren teach the children how to get along with other people, which isabsolutely essential for a civil society. The interactions between the adultsof the household help them to sustain their relationship as they face thenumerous challenges to raising children.

But theneed for face time between family members so that children can learn importantlife skills is even more fundamental than this. From an evolutionaryperspective, “We’ve evolved to be social beings and the survival of ourspecies depends on getting along with other people,” said Stephanie Brown,a social psychologist at the University of Michigan. Compared to other mammalssuch as wolves and chimpanzees, humans are weak. To compensate for lack ofbrawn and superior size we developed bigger brains and a complex system ofinterdependence that is unique. Our offspring require years of care that isgenerally shared by parents and other caring adults before reaching adulthood.Once grown, we still need constant interaction with other adults to sustainourselves both emotionally and physically. In short, Brown said, “Ourrelationships are like the air we breathe. They’re the thing that enables ourspecies to survive.”

From ascientific perspective, neuroscience research into the neurological andhormonal underpinnings of our familial relationships has also shown thatfrequent interactions among household members are crucial. Interaction does notmean constant yakking, however.

“Nearproximity counts far more than we realize consciously,” said psychologistDan Goleman, the author of “Emotional Intelligence” and “SocialIntelligence.”

When wechitchat, as comedian Jerry Seinfeld might say “about nothing,” orsay nothing at all, our brains are busy communicating with each other. As Golemanexplained it, our brains have a set of circuits “designed” tointeract with the identical circuits of the person we are talking to. Thesemirror neurons “scan” what the person you’re with is talking aboutand how he is moving. Then they activate the same areas in your brain so thatyou are literally on the same wavelength.

Thecircuitry takes years to develop, however. When we’re born, we’re nothardwired.

“We’renot programmed for social behavior like a fish whose brain is fully mature atbirth,” said Peter Whybrow, a psychiatrist, director of the SemelInstitute for Neuroscience at UCLA, and the author of “AmericanMania.” Instead, we have to learn the complex social behaviors that weneed to be comfortable later in life from the adults who raise us. The neuralcircuitry of our frontal cortex, which is the major thought and decision-makingarea of the brain, is literally developed and shaped by the thousands ofone-on-one interactions between a parent or other caring adult and a child, aswell as the interactions between other people that a child observes.

The moreverbal interactions a child participates in or observes, the more the braindevelops. This will happen naturally when family members are in the same space.Not only are their interactions richer, “its’ terrific for braindevelopment,” Goleman said.

As achild’s developing neural circuitry becomes increasingly more complex, hegradually learns to navigate his world by walking, talking and the less obviousbut equally profound ability to think. This leads to the slowly dawningrealization that he’s not the center of his universe and, from about the age of5 to 15, the gradual development of empathy, the conscious awareness of otherpeople’s thoughts and emotions, the critical skill for getting along withothers, Whybrow said.

Uponreaching maturity, a child is able to live independently. But humans still needthe ongoing presence of other people in their lives because in adulthood we arebound together by the hormones that begin to function during adolescence andaffect our brains and our behavior for the rest of our lives. 

Some ofthese hormones are sexual and lead to mating, reproduction and the perpetrationof the species. Less well known, but equally critical, are the”bonding” hormone oxytocin and the “danger-alert” hormonecortisol.

Anytimeyou are with people you are close to and trust, your brain releases oxytocin.This reinforces the brain’s bonding circuits and you feel calmer, explainedLouann Brizendine, a professor of psychiatry at the University of California inSan Francisco and the author of “The Female Brain.” When teenagedgirlfriends chatter endlessly, they literally feel better because oxytocin issurging in their brains, she said.

To get thebenefits of oxytocin’s calming effect and what Brizendine calls “bodytime,” however, “you have to be in the same place, see and sense theother person, and breathe the same air,” she said.

With smallchildren, body time means “floor time” because you have to be attheir level to interact face-to-face and eye-to-eye, Brizendine said. As youroll around and play or sit quietly and read together, there’s plenty of bodycontact that increases the amount of oxytocin released in your brain. Withsomewhat older children, there’s still plenty of calming body contact for theparents. But once kids hit adolescence, body time means being in the same roombecause “they won’t let you touch them,” Brizendine said, adding thatteens themselves want body time with their parents, though most would neveradmit it.

Oxytocinhas huge health benefits, Brizendine went on to say. It’s as essential to thehuman brain and body as taking vitamins, and humans suffer isolation anddepression without it. Equally important, the calming effects of oxytocin reduceand counteract the effects of cortisol, which our bodies produce more oftenthan we think in the course of our often-stressful lives and whose ill effectsare not appreciated by the general public. “Chronic stress and no downtime is known to produce enough cortisol over time to damage those areas of thebrain that affect our memory,” Brizendine said.

Moving onfrom neuroscience, there is yet another reason for spending time with familyand close friends, and one that has been appreciated since time immemorial,Whybrow said. Close and trusting relationships are wonderfully enrichingbecause people are “infinitely variable and you will never figure outanother person completely. No matter how long you’ve known them, they can stillsurprise you.”

Questionsor queries? Katherine Salant can be contacted at www.katherinesalant.com.

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

Copyright 2007 Katherine Salant

DEAR BOB: In 2003 we bought a modular home and had it set upon a lot we owned. After all the expenses of having a foundation built,plumbing and wiring installed, etc., when we sold it in late 2006 we barely gotour investment out. We learned modular homes can be lousy investments. Do wehave to report this sale to the IRS? –Thomas R.

DEAR THOMAS: If your sales proceeds did not equal the amountyou invested in the modular home and the cost of the lot, then you had nocapital gain profit. But the sale must be reported on Schedule D of your incometax returns, although no tax will be due if you had no profit.

Purchase Bob Bruss reports online.

However, if the home was your principal residence for atleast 24 of the last 60 months before its sale, then Internal Revenue Code 121does not require you to report the sale unless your capital gain exceeded$250,000 (or more than $500,000 for a married couple filing a joint taxreturn). For full details, please consult your tax adviser.

NO EASY WAY TO FORCE A PROPERTY SALE BY FIVE OWNERS

DEAR BOB: My dad died in 2005. No will. Mom passed away in1999. He left his house worth around $500,000. There are five adult children. Hisestate has been in probate almost two years, with no sign of any conclusionsoon. Dad left debts of about $125,000. The estate executor has sold off dad’scar, furniture, etc., to pay the unsecured debts. But there was a $40,000mortgage on the house. I think we should sell the house to pay off the mortgageand then split the proceeds. But two sisters refuse to agree to the house sale.What can we do? –Ralph S.

DEAR RALPH: Before the estate assets can be distributed tothe heirs, which I presume are the five offspring, the estate debts must bepaid. If there are not enough liquid assets to pay the debts, such as personalproperty, stocks, bonds, and bank accounts, then the house will have to be soldeven though the two sisters don’t want to sell.

In most cases, it will be the probate court judge who makesthe final decision if the estate administrator can’t reach a consensus with theheirs.

Your situation shows what can happen when a property ownerdies without a will and there is disagreement among the heirs. I can see whythe probate has taken two years and there is no end in sight. At this point,the best you can do is try to get all the heirs to agree on a course of action.Otherwise, it will be up to the probate judge, and he might not decide what theheirs prefer.

LONG-DISTANCE GROUP INVESTING CAN BECOME A MESS

DEAR BOB: Upon the recommendation of a trusted friend, myhusband and I invested about $225,000 in a group investment in a shoppingcenter. We had never seen the shopping center, but the Realtor said it was in agood area. That’s true. However, it is now about 40 percent vacant due to theRealtor’s bad management. Also, it needs at least $200,000 of repairs just tomake it attractive to prospective retail tenants. It is mortgaged to the hilt sowe can’t borrow more on a third mortgage. The other investors refuse to put anycash into the shopping center. The mortgage is two months in default. What canwe do? –Helen R.

DEAR HELEN: Now you know why I do not recommend group realestate investing, especially when the property is located a long distance awayand the owners are at the mercy of the property manager.

At this point, it appears selling the shopping center is theonly viable alternative to losing it by foreclosure. I wish I could be more encouragingbut without any equity on which you can borrow, getting the co-owners to agreeto a sale might be best.

The new Robert Bruss special report, “2007 Realty TaxTips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,”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 columnare welcome at either address.

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

***

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

Copyright 2007 Inman News

DEAR BOB: In 2003 we bought a modular home and had it set upon a lot we owned. After all the expenses of having a foundation built,plumbing and wiring installed, etc., when we sold it in late 2006 we barely gotour investment out. We learned modular homes can be lousy investments. Do wehave to report this sale to the IRS? –Thomas R.

DEAR THOMAS: If your sales proceeds did not equal the amountyou invested in the modular home and the cost of the lot, then you had nocapital gain profit. But the sale must be reported on Schedule D of your incometax returns, although no tax will be due if you had no profit.

Purchase Bob Bruss reports online.

However, if the home was your principal residence for atleast 24 of the last 60 months before its sale, then Internal Revenue Code 121does not require you to report the sale unless your capital gain exceeded$250,000 (or more than $500,000 for a married couple filing a joint taxreturn). For full details, please consult your tax adviser.

NO EASY WAY TO FORCE A PROPERTY SALE BY FIVE OWNERS

DEAR BOB: My dad died in 2005. No will. Mom passed away in1999. He left his house worth around $500,000. There are five adult children. Hisestate has been in probate almost two years, with no sign of any conclusionsoon. Dad left debts of about $125,000. The estate executor has sold off dad’scar, furniture, etc., to pay the unsecured debts. But there was a $40,000mortgage on the house. I think we should sell the house to pay off the mortgageand then split the proceeds. But two sisters refuse to agree to the house sale.What can we do? –Ralph S.

DEAR RALPH: Before the estate assets can be distributed tothe heirs, which I presume are the five offspring, the estate debts must bepaid. If there are not enough liquid assets to pay the debts, such as personalproperty, stocks, bonds, and bank accounts, then the house will have to be soldeven though the two sisters don’t want to sell.

In most cases, it will be the probate court judge who makesthe final decision if the estate administrator can’t reach a consensus with theheirs.

Your situation shows what can happen when a property ownerdies without a will and there is disagreement among the heirs. I can see whythe probate has taken two years and there is no end in sight. At this point,the best you can do is try to get all the heirs to agree on a course of action.Otherwise, it will be up to the probate judge, and he might not decide what theheirs prefer.

LONG-DISTANCE GROUP INVESTING CAN BECOME A MESS

DEAR BOB: Upon the recommendation of a trusted friend, myhusband and I invested about $225,000 in a group investment in a shoppingcenter. We had never seen the shopping center, but the Realtor said it was in agood area. That’s true. However, it is now about 40 percent vacant due to theRealtor’s bad management. Also, it needs at least $200,000 of repairs just tomake it attractive to prospective retail tenants. It is mortgaged to the hilt sowe can’t borrow more on a third mortgage. The other investors refuse to put anycash into the shopping center. The mortgage is two months in default. What canwe do? –Helen R.

DEAR HELEN: Now you know why I do not recommend group realestate investing, especially when the property is located a long distance awayand the owners are at the mercy of the property manager.

At this point, it appears selling the shopping center is theonly viable alternative to losing it by foreclosure. I wish I could be more encouragingbut without any equity on which you can borrow, getting the co-owners to agreeto a sale might be best.

The new Robert Bruss special report, “2007 Realty TaxTips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,”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 columnare welcome at either address.

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

***

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

Copyright 2007 Inman News

DEAR BOB: I am 63 and hope I can continue working until I am 70 when my Social Security benefits will nearly double. My $935,000 home needs about $30,000 in repairs. I had hoped to live on reverse-mortgage income until I retire, but the amount I would receive is so small I couldn’t afford the repairs. It seems I have no recourse but to sell my 50-year-old home. Any suggestions? –Helen W.

DEAR HELEN: Your real problem is you are too young and your life expectancy is too long to gain maximum benefits from a senior-citizen reverse mortgage. Because you didn’t mention any existing mortgage, I will presume there is none.

Purchase Bob Bruss reports online.

Another possibility is to obtain a home equity credit line to pay for the $30,000 of repairs. But the big drawback is a home equity loan requires monthly payments whereas a reverse mortgage does not require any payments.

As you probably know, there are three nationwide reverse-mortgage lenders: FHA, Fannie Mae and Financial Freedom Plan. FHA and Fannie Mae are usually best for homes worth up to $500,000. Above that, Financial Freedom Plan often is the best alternative.

Please consult a reverse-mortgage representative who offers all three plans so you can compare them. You can find reputable reverse-mortgage originators at www.reversemortgage.org.

MUST HOMEOWNER OWN RESIDENCE FOR 60 MONTHS?

DEAR BOB: You often mention Internal Revenue Code 121. To qualify, you say the principal-residence owner must reside in the home at least 24 of the last 60 months before its sale. Does that mean I have to own my house at least 60 months before I qualify for the $250,000 exemption? Also, you say this tax break can be used every 24 months. How does that fit in with the 60 months? –John L.

DEAR JOHN: Internal Revenue Code 121 is very flexible. To qualify for the principal-residence-sale exemption up to $250,000 for a single owner, or up to $500,000 for a qualified married couple filing a joint tax return, the seller(s) must have owned and occupied their primary dwelling an aggregate 24 out of the last 60 months before the sale.

The 24 months need not be continuous. For example, you could live in your house for a year, rent it out for two years to tenants, and move back in for another 12 months to qualify.

There is no need to own the home for 60 months. You can qualify for this tax break if you bought your principal residence as recently as 24 months ago, providing you occupied it as your “main home” for those 24 months.

IRC 121 can be used over and over again, without limit, but not more frequently than once every 24 months. For full details, please consult your tax adviser.

IF YOU’RE NOT MARRIED TO CO-OWNER, JOINT TENANCY NOT RECOMMENDED

DEAR BOB: My daughter will be buying a house with her boyfriend (whom she does not plan to marry). How do you recommend they take title together? Is joint tenancy a good idea? –Kenneth R.

DEAR KENNETH R.: I’m sure your daughter has her reasons for buying a house with a guy she doesn’t plan to marry, but I can see endless complications, none of them advantageous.

I do not recommend they hold title as joint tenants with right of survivorship. That means if one of them dies, the survivor owns the entire property. Is that what they really want?

When two co-owners take title together, they usually hold title as tenants in common. Then, if one of the tenants in common dies, their ownership share passes according to the terms of their will.

But a big disadvantage of tenant-in-common ownership is if one co-owner wants to sell but the other doesn’t, one co-owner can bring a partition lawsuit to force a sale of the property.

Better yet, holding title in a partnership allows specifying terms that should be considered, such as a buy-out agreement, or what happens if one partner can’t pay his/her share of the mortgage payment and other expenses. Your daughter should consult a real estate attorney in the community where the property is located to discuss her title choices.

The new Robert Bruss special report, “2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” 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

Until 2004 the Savanna Club Worship Service Inc. conductedits worship services in the Savanna Homeowners Association clubhouse or commonareas. But the homeowner association received numerous complaints from itsmembers regarding use of the common areas for religious services.

One of the reasons for the complaints was such usage wascontrary to the stated purpose of making the common areas available for use andenjoyment of the members of the association.

Purchase Bob Bruss reports online.

After receiving numerous complaints, the associationconducted an informal vote of its members. They voted 714 to 434 to prohibitreligious services in their common areas.

As a result, the association adopted a rule that “Noportion of the common areas of Savanna Club may be used for any religiousservice.”

Following enactment of the rule, the worship club continuedholding its services. But the homeowner association filed a court petition formediation. Following mediation, the club stopped holding its religious servicesin the common areas.

The worship club then brought this lawsuit against theSavanna Club Homeowners Association, alleging the rule barring religiousservices violates the federal Fair Housing Act.

If you were the judge would you rule the homeownerassociation rule barring religious services in the common areas violates theFair Housing Act?

The judge said no!

The evidence shows the homeowner association rule has beenapplied evenly, and no religious group has been allowed to use the common areasfor its religious services, the judge began. Although the worship club hasstanding to sue, it failed to present any evidence of violation of the FairHousing Act or any other law, he continued.

Savanna Club is a unique planned community, the judgeexplained. Its common areas are open to all its members, and there is noevidence of any religious or other discrimination involving purchase or use ofresidences within the community, he noted.

The worship club has not presented any evidence ofdiscrimination, the judge emphasized, because all religious groups areprohibited from holding services in the common areas. “The right toreligious freedom must encompass the right to be free from religion,” headded.

The Fair Housing Act imposes no “reasonableaccommodation” requirement in the context of religious discrimination, thejudge ruled. Because the challenged rule of the homeowner association has beenapplied equally to all religions, there is no Fair Housing Act violation, andthe worship club is not entitled to use the common areas, the judge concluded.

Based on the U.S. District Court decision in Savanna ClubWorship Service Inc. v. Savanna Club Homeowners Association Inc., 456Fed.Supp.2d 1223.

(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

Q: I live in a 1940s flat that was once wallpapered with aheavily textured, old-fashioned, velvet wallpaper — probably red. Thewallpaper was hung in all of the living areas of the home and has many, manycoats of flat paint over it, which has covered some of the texture. But becausethe texture is so pronounced, the old-fashioned pattern of the wallpaper stillremains. I would like smooth walls in the living and dining areas of my home, butbecause I rent, I don’t want to incur the expense or the big job of taking offthe many layers or replacing the walls with new drywall. Would it be possibleto use drywall compound to smooth out and fill in all of the patterns andtexture of the wallpaper?

A: Ourmother had a bathroom done in red flocked paper. We called it the New Orleansbordello. Being a proper lady, she did not appreciate that comment.

Normallywe wouldn’t suggest applying drywall compound to wallpaper, even if the paperis covered with several coats of paint. However, your circumstances lead us toconsider this option.

Tworeasons to avoid skim coating over wallpaper are aesthetics (it’s tough to makeit look good) and the chance that water in the mud will penetrate the paper andloosen it. If that happens, you’ve got one big bubbly mess.

Wesympathize with your reticence about investing even a little money in someoneelse’s property. And we applaud your willingness to invest a little time andperspiration to make your living area more attractive — even though you don’town it.

Ratherthan get the drywall knife and mud bucket out right away, why not consideranother angle? Think about approaching your landlord with an offer to strip theold wallpaper. It’s a big job, but if you’re up for it, you might be able topersuade the landlord to go for it. Ask him to rent the steamer and you supplythe labor. When you’re done, you’ll have the smooth walls you want, and thelandlord will have gotten a real bargain on a hot and time-consuming job. Heck,if one of us were the landlord, we’d even be receptive to a credit on the rent.

If youdon’t want to go the stripping route, you could try to skim coat over theflock. But beware. It will take a lot of time and a lot of mud, and the resultprobably won’t be as good as stripping the paper. This is how we’d approach thejob:

It’sabsolutely essential that the wallpaper be sealed to prevent water infiltrationfrom the mud. Remove any loose paper and glue down any seams that may haverisen over the years. Then apply a full coat of oil-based primer to the wall.Allow it to dry thoroughly before skim-coating the wall with joint compound.Dry for at least 24 hours, with 48 being better. It will probably take threeapplications of mud and some touch-up to cover all of the imperfections on thewalls.

Mix somewater into the premixed compound so that the texture of the mud is smooth andeasy to work with. Apply the mud to the wall using a wide drywall knife. A12-inch knife works well.

Try to getthe mud as smooth as possible. Then leave it alone and let it dry for a day.With any luck, you’ll have no bubbly wallpaper. Lightly sand the wall and applythe second coat in the same manner as the first. Repeat the process with thethird coat.

At thispoint the walls should look smooth. Apply a coat of paint to the finished wall.This inevitably highlights the defects and voids. Patch the defects and applythe finish coat. Whichever way you choose, we wish you smooth and attractivewalls.

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

Copyright 2007 Bill and Kevin Burnett

While someof the nation’s leading economists are optimistic for an improved housingoutlook during the second half of 2007, Wall Street’s capital markets researchers– the money guys — are concerned hundreds of thousands of home loan borrowerscould be in default before the summer months arrive.

ChrisFlanagan, managing director and head of global research for JP MorganSecurities, said approximately 35 percent of all subprime mortgage borrowerscould have a difficult time meeting their loan obligations when theiradjustable-rate mortgages hit their first adjustment period.

“Theseare consumers who were getting into 100 percent loans when home prices weresoftening,” Flanagan said. “The more troubling characteristic werethe lenders willing to reach to make those mortgages available.”

Flanagan’sresearch revealed that 10 percent to 15 percent of all new loans originated inthe fourth quarter of 2005 and all of 2006 were subprime loans — mortgagesthat typically carry higher interest rates due to greater borrower risk. And,if capital market players like JP Morgan find mortgage securities no longerattractive, the result could be higher mortgage interest rates.

The amountof money at stake could be $200 billion, with as many as 500,000 to 1 millionconsumers in potential jeopardy. Many of the loans were “statedincome” or low-documentation loans, which involved a relativelylow-interest-rate first mortgage and a simultaneous, or “silentsecond,” mortgage, which together equaled the entire value of theproperty. In the mortgage business, this is known as a 100 percentloan-to-value-ratio loan.

FrankNothaft, chief economist for mortgage giant Freddie Mac, said while subprimeborrowers typically have a default rate eight to 10 times greater thanconforming borrowers, he was more suspicious of the huge share ofspeculators/investors than owner-occupants.

“Foran owner-occupant to go into default, you usually have to have a trigger eventlike unemployment or serious illness in the family,” Nothaft said.

LeslieAppleton-Young, chief economist for the California Association of Realtors,said many buyers in Los Angeles County “were underwater” with theirloan payments in 1992 but managed to find a way to stay in the home and accruethe amazing appreciation of the past 10 years. Last year, when home pricessoftened, many potential buyers lost the “psychological impetus” toget into the market.

“Duringthe boom, houses in some neighborhoods were going up 20 percent,”Appleton-Young said. “Consumers could not afford not to buy. But when thatthat appreciation factor goes away, psychologically they are not in the sameplace.”

Themanufacturing sector has continued to suffer. Delinquencies and foreclosureshave increased in low-employment regions like Michigan, Indiana, Kentucky,Virginia and Ohio. Of the 1.8 million jobs created last year, not one of themwas in Michigan, according to Nothaft.

Bankingregulators have scrutinized low-down-payment mortgages for the past two yearsyet lenders have not significantly curtailed “exotic” programs. Thesubject often fuels the controversial question if lenders have gone too far inextending credit to consumers — or have they simply helped borrowers get in tomarkets unattainable with a conventional loan. Nothaft believes that whileexotic mortgages have a place and serve a specific niche, many borrowers whoshould not be approved for them get them anyway.

Nothaftpredicted that 30-year fixed-rate loans would rise a tick during the secondhalf of 2007 — averaging 6.3 percent, up from 6.2 percent — but that 2007would in no way resemble the boom times of 2005.

“Homesales were down 18 percent in 2006 from 2005 and I don’t think we are at thebottom of the trough yet in 2007,” Nothaft said. “What limited theaffordability was that both interest rates and home prices rose at the sametime. We are not going to see that later this year, and we should also havestable family income.”

SusanWachter, professor of real estate and finance at the University ofPennsylvania’s Wharton School, was not as optimistic as Nofthaft about the 2007outlook. Not only was the first half of the year “in the bag” butalso the second half was “more in question” and the year as a wholecould resemble a repeat of 2006.

“Thefirst half will have high inventories in a lot of areas but the second leg ofthis thing is that home equity has been supporting this economy,” Wachtersaid. “That isn’t going to be there this year because consumers havealready taken it out of their homes. As prices decline, I think there could bea downside risk, especially if inflation begins to move higher.”

TomKelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent andProfit from Property South of the Border” was written with MitchCreekmore, senior vice president of Houston-based Stewart International. Thebook is available in retail stores, on Amazon.com and on tomkelly.com. Tom canbe reached at news@tomkelly.com.

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

Copyright 2007 Tom Kelly