Real Estate in Steamboat

DEAR BOB: After much research, my husband, who is now 74,decided to get a senior citizen reverse mortgage on our home. Since I was only60 at the time, I quitclaimed my interest in the house to him because I was tooyoung. We chose the reverse-mortgage line of credit and have withdrawn only asmuch as our savings would cover if my husband dies. I know I could get areverse mortgage, as I am now 62, but our question is whether our house willhave to go into probate court when my husband dies since I am no longer on thedeed. How can we avoid this because our home is our biggest asset? –Sheila P.

DEAR SHEILA: That’s easy. I was expecting a tough question.Your husband can transfer title from himself to his revocable living trust,which, presumably, will name you as the successor trustee and the futurebeneficiary if he dies first.

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Reverse-mortgage lenders have no objection to borrowersplacing title to their homes into their living trusts after the reversemortgage is recorded. By placing the home title into your husband’s livingtrust, probate costs and delays will be avoided if he dies first.

Equally important, if your husband should becomeincapacitated, such as with Alzheimer’s disease or a severe stroke, as thesuccessor trustee you can then manage the living-trust assets, includingselling or refinancing of refinancing the house. Details are in my specialreport, “24 Key Questions Answered: Living Trust Secrets Reveal How toAvoid Probate Costs and Delays,” available for $5 from Robert Bruss, 251Park Road, Burlingame, CA 94010, or by credit card at 1-800-736-1736 or instantInternet delivery at www.BobBruss.com.

UMBRELLA INSURANCE SAVES MONEY AND INCREASES PROTECTION

DEAR BOB: Thank you for writing about umbrella insurancepolicies some time ago. Until I read that, I had been carrying $1 millionliability coverage on my house, three rental properties and $5 million on myautomobile policies. My insurance agent advised the high liability coveragebecause of my high net worth. When I clipped your article and faxed it to myinsurance agent, he said I could reduce the liability coverage on each propertyand my automobiles to $300,000 each, and obtain a $5 million liability umbrellapolicy for slightly lower total premiums as I was paying. Your great advice forbetter coverage more than paid for a lifetime subscription to the newspaper.–Dr. Carl W.

DEAR DR. CARL: Thanks for your compliments. For readers whohave no clue what an umbrella liability policy is, it is an insurance policythat takes over coverage on large liability losses exceeding the basicinsurance policy coverage. It is best to have all your property liabilitypolicies with the same insurer so there is no conflict between insurancecompanies.

To illustrate, suppose you are at fault in a bad automobileaccident that injures or kills several people. Your basic auto policy will paythe first $300,000 of liability coverage. Then your umbrella policy will takeover and pay any additional liability losses up to $5 million total.

If you think you need additional liability coverage above $5million, the additional premium for a few more million dollars will be onlyseveral hundred dollars (because of the small probability the insurance companywill ever have to pay such a large loss).

RENTER’S INSURANCE COVERS MORE THAN PERSONAL PROPERTY

DEAR BOB: You recently said a tenant should have renter’sinsurance to pay for damage to his/her apartment. The individual reader left adinner on the stove and the fire did about $15,000 damage to her apartment. Ithas always been my understanding that renter’s insurance simply covers thetenant’s personal belongings, such as clothing and furniture. But the owner isresponsible for the apartment house or detached rented house. Am I wrong?–Beverly B.

DEAR BEVERLY: If a tenant has a renter’s insurance policy,it covers loss due to theft and fire affecting the tenant’s personal property.But it also provides liability coverage for the tenant’s negligence.

For example, if I visit a friend’s apartment, trip over aloose rug, and am injured, the tenant’s rental insurance policy will pay for myinjuries due to the tenant’s negligence. The same renter’s policy also providesliability coverage if the tenant’s negligence causes damage to the landlord’spremises, up to the policy limit.

Similar insurance policies are available to condominium ownerswho should always carry condo owner’s insurance even though the condohomeowner’s association insures the condo complex’s common areas, including thebuilding structure for fire and liability coverage. For details, please consultyour insurance agent.

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).

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Copyright 2007 Inman News

If you want to avoid costly mistakes when buying a condo,co-op or townhouse, “Tips and Traps When Buying a Condo, Co-op, orTownhouse, Second Edition” by Robert Irwin explains virtually all thepotential pitfalls and how to avoid them. This easy-reading book is filled withmany examples from the author’s experiences with these unique types of housing,which require more than just casual investigation.

Irwin explains both the advantages and disadvantages of whathe calls “shared ownership properties.” But don’t be misled. He doesnot even mention the popular “tenant in common” (TIC) residences thathave become popular in several cities to avoid the legal aspects ofcondominiums.

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Although the book’s emphasis is on the negatives of condosand co-ops, as it should be, the author occasionally discusses the benefits ofthis special type of housing. But he spends much of the book warning what tolook for and avoid in apartment buildings that have been converted to condos orco-ops.

This ultra-complete book uses many pages warning about thenegatives of cooperative apartment buildings, found mostly in New York,Chicago, Florida and a few California cities. The huge negative of the board ofdirectors’ inquisition approval or disapproval of prospective co-op buyers andrenters, Irwin warns, holds down the market value of co-ops compared toequivalent condominiums that do not require approval of prospective buyers.

As the current and previous owner of several condominiums,Irwin shamelessly shows his battle scars from dealing with boards of directorsand architectural committees. He warns condo buyers to read the CC&Rs(covenants, conditions and restrictions), by-laws and rules before purchase,but don’t think you can change these limitations after you buy.

If the book has a drawback it would be it is too positiveabout buying a condominium. Irwin fails to emphasize the possible drawbacksprospective buyers should consider, such as poor soundproofing, living close toyour neighbors, restrictions on pets, limitations or prohibitions againstrenting to tenants, and other rules that were enacted to benefit the condoowners.

For example, Irwin omits the reasons why condo boards ofdirectors struggle to limit or prohibit rentals because when rentals pass 20percent to 30 percent of the units, mortgage lenders either stop lending in thecomplex or charge buyers abnormally high interest rates due to the increasedrisk of foreclosures.

Although Irwin obviously has considerable personalexperience with condominiums, as a critical reader I wondered why he made somestatements.

To illustrate, he says: “You owe it to yourself toattend at least one board meeting before buying a unit in any development.After all, these are the people who will be setting and enforcing the rulesunder which you’ll be expected to live.” First, the author makes it soundlike the condo (or co-op) board of directors is the enemy, although they act onbehalf of the owners. Second, I doubt whether prospective buyers would even beallowed to attend most monthly board meetings.

Chapter topics include “Is It a Good Investment?”"How to Decide if a Condo, Co-op, or Townhouse is Right for You”;”Nine ‘Red Flag’ Questions You Must Ask Before You Buy”; “BuyOld, Buy New or Buy a Conversion?” “How to Evaluate What You areBuying”; “Checking the Inspection and Disclosure Reports”;”Living by the Rules”; “Beware the Architectural Committee”;”Fighting the Board”; “Can I Rent Out My Condo, Co-op orTownhouse?” “Tips on Financing a Condo or Co-op”; “Just forCondo Buyers”; “Just for Co-op Buyers”; “Just for TownhouseBuyers”; and “Tips for Selling Your Condo, Co-op or Townhouse.”

This is an excellent book for anyone considering thepurchase of a condo or co-op. It raises virtually all the unique issues thatconfront owners of these specialized types of housing. On my scale of one to10, this ultra-complete book rates a solid 10.

“Tips and Traps When Buying a Condo, Co-Op, orTownhouse, Second Edition,” by Robert Irwin (McGraw-Hill, New York), 2007,$16.95, 202 pages; available in stock or by special order at local bookstores,public libraries and www.Amazon.com.

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

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Copyright 2007 Inman News

Dear Barry,

I am quite disgusted with the home inspection industry.Before buying my home, I hired the inspector who was recommended by my agent.First of all, $350 is a lot of money to pay someone just to flush the toiletand inform me that there are rust stains on the bottom of the kitchen sink.What’s more, the inspector referred me to a structural engineer just because ofa tilted foundation pier in the crawlspace. Couldn’t I perform my own basicinspection with some sort of checklist and then, if an item appears faulty,call a licensed contractor? –Gloria

Dear Gloria,

Judging an entire profession by the performance of oneindividual is a shortcut to unreliable conclusions. The best and worstpractitioners can be found in every field of work. It is possible that a morequalified inspector would have disclosed a longer list of defects. On the otherhand, this home may have been one of the few with very few faulty conditions.The recommendation for a structural engineer may or may not have beenjustified, depending upon the specifics of that situation.

As for your suggestion that you perform your own homeinspection, ask yourself if you have the experience and expertise to evaluatethe wiring in a circuit breaker panel, to review the conditions of a forced-airfurnace, or to ascertain whether a fireplace and chimney are properlyconstructed and in operational condition. Ask yourself if you are prepared tocrawl through an attic or foundation subarea and whether you would recognizethe various construction defects that would pertain to roof framing, seismicreinforcement and ventilation. Additional examples could fill several pages andstill not comprise a complete list.

Despite your recent disappointment, there are many highlyqualified home inspectors who can provide detailed, comprehensive defectdisclosure for home buyers. Rather than draw conclusions about the entire homeinspection industry, buyers should try to find an inspector with many years ofexperience and a reputation for thoroughness. Don’t simply rely on referralsmade by your agent.

Dear Barry,

We just bought a home with a clay tile roof. Our homeinspector reported some broken tiles, and the sellers had these replaced. Butthen the building was tented for termites, and the people who did the tentingnever told us that they broke more tiles. Now the rains have come, and we’vegot a leaking roof. Shouldn’t someone have informed us that the roof tiles werebroken when the house was tented? –Lonny

Dear Lonny,

Companies that fumigate houses for termites typicallyinclude a disclaimer in their contract, stating that they are not responsiblefor broken roof tiles. Essentially, they are informing customers of thelikelihood of tile breakage, without accepting liability for roof repairs.However, it would certainly behoove these contractors, as a matter ofprofessional courtesy, to disclose that tiles were in fact broken, regardlessof whether they are responsible for repairs. These companies might not agreewith this point of view, but a Small Claims judge might be inclined to reorienttheir perspective.

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

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Copyright 2007 Barry Stone

DEAR BOB: I am four months late on my mortgage paymentsbecause of a job loss. Now I am in the process of foreclosure. What are myoptions? I am back working again but do not have all the money yet to catch upon my monthly payments. Any advice? –Jawanna P.

DEAR JAWANNA: Please don’t bury your head in the sand, asmany borrowers who are in mortgage default do. Instead, contact your mortgagelender immediately by phone.

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Explain your situation very politely. Ask for a forbearanceand a loan workout plan. That is presuming you can now afford to pay at leastthe regular monthly mortgage payment.

Ask that your unpaid mortgage payments, probably totalingseveral thousand dollars, be added to your mortgage principal. The result willextend your mortgage by several months but then your mortgage can be reinstatedin good standing with the lender.

Lenders do not want to foreclose. They lose money onvirtually every foreclosure. But lenders will insist their borrowers make themonthly payments on time.

If you are unable to resume the regular monthly payments,then ask the mortgage lender for time to sell your home to pay off the mortgagebalance.

But do everything you can to avoid a foreclosure sale. Worseyet, filing bankruptcy will merely delay losing your home by foreclosure if youare unable to pay the monthly payments.

FAST FLIPPING RESULTS IN HIGH TAX RATE

DEAR BOB: I read an article on a Web site that says if youflip a property without holding title for 12 months or longer you will be taxedat 50 percent of profit. But holding longer, the tax is only 15 percent. Trueor false? –Puba H.

DEAR PUBA: Neither is fully correct. If you hold title to afix-up “flipper property” or any asset less than 12 months, your saleprofit will be taxed as ordinary income, just like your job salary, dividendsand interest. The exact federal tax rate varies widely, depending on yourincome tax bracket, from a low of 10 percent up to a maximum of 35 percent,plus state tax.

However, if you hold a “flipper property” or anyasset over 12 months, then your maximum federal long-term capital gain tax rateis 15 percent of your profit (plus applicable state tax). If you are in a lowtax bracket, your long-term capital gain tax will be even lower than 15percent. For full details, please consult your tax adviser.

DON’T RUSH TO SELL HOME AFTER SPOUSE’S DEATH

DEAR BOB: Do I need to sell my house before the one-yearanniversary of my husband’s death in order to preserve that $500,000 home-saletax exemption? My capital gain will be in excess of $250,000. –Gloria R.

DEAR GLORIA: Please don’t rush to sell your home. Theanniversary date of your spouse’s death is irrelevant for tax purposes.

To qualify for the $500,000 principal-residence-sale taxexemption of Internal Revenue Code 121, presuming both spouses met the24-out-of-last-60-months occupancy test, the principal residence must be soldwithin the same tax year as the spouse’s death.

The reason you don’t need to rush to sell your home is,presuming you inherited your late husband’s share of the residence, you willreceive a new “stepped-up basis” as of the date of his death.

If the principal residence is in a common law state, youwill receive a 50 percent stepped-up basis to market value as of the date ofdeath. However, if the house is in a community property state, as the survivingspouse you will get a new 100 percent stepped-up basis so you will have littleor no capital gain tax if you sell the home within a few years after yourspouse’s death. For full details, please consult your tax adviser.

SHOULD HOME SELLER “START CLEAN” WITH NEW LISTING?

DEAR BOB: We had our house on the market for sale almostfour months with no offers. All the houses in our price range have not sold inour upper-middle-class neighborhood. It shows well, according to the localRealtors. We are thinking of taking our house off the market for a short periodand then re-listing it to “start clean.” How long should we keep itoff the market? Should we use the same Realtor (she has been great, but won’tgive us a straight answer on this.) –Jan L.

DEAR JAN: It used to be possible to “start clean”so your home would look to buyers and their agents like a new listing. However,most MLS (multiple listing service) computers can now report how many days ahouse has been on the market for sale within the last 12 months, both in itscurrent and previous listings.

If you are satisfied with your Realtor’s services, thenre-list with her, but never for longer than 90 days at a time. However, if shewouldn’t give you a straight answer, I suggest you interview at least threeother successful local realty agents to ask them why, in their opinions, yourhome didn’t sell.

The obvious problem is your home might be overpriced. Butsome sellers are shocked to discover their listing agent is the obstacle.Perhaps she is uncooperative or disliked by many local agents. Maybe she makesyour home difficult for other agents to show to their prospective buyers.

By interviewing other agents, you will get their CMA(comparative market analysis) forms to show your home’s current market valuebased on recent sales prices of comparable nearby homes, and the asking pricesof similar neighborhood residences (your competition).

$25,000 IS MAXIMUM ANNUAL INVESTMENT PROPERTY LOSS

DEAR BOB: I am considering investing in rental property. Iseach property considered an entity, eligible for the $25,000 annual tax lossdeduction from ordinary income? Or is the loss limited to $25,000 for all of aninvestor’s properties? –Martin S.

DEAR MARTIN: Unless you or your spouse qualifies forunlimited annual investment property deductions as a “real estateprofessional” spending at least 750 hours per year on your real estateactivities, you are limited to a $25,000 total annual loss deduction from allyour investment properties against your ordinary taxable income.

However, unused losses (mostly from the noncash depreciationdeduction for wear, tear and obsolescence) are “suspended” for use infuture tax years, or when you sell a property you can use suspended losses tocut your taxable capital gain. For full details, please consult your taxadviser.

TWO $250,000 HOME-SALE EXEMPTIONS FOR SPOUSES LIVING APART

DEAR BOB: My husband and I have been profitably flippinghouses for several years. We are planning on separating soon. I plan to live inmy next fixer-upper house while making repairs. If we should both own andoccupy separate principal residences for a minimum of 24 months within the next60 months, and one or both of us decides to sell within that time frame, willwe each qualify for up to $250,000 tax-free profits even if our divorce has notbeen finalized by then? –Sherry F.

DEAR SHERRY: If your husband lives in one principalresidence for the required 24 of the last 60 months before its sale, and youlive in another principal residence for the same required time, presuming thatindividual’s name is on the title to the home they are living in and selling,then each can qualify for up to $250,000 principal-residence-sale tax-freeprofits, thanks to Internal Revenue Code 121.

When your plans become definite, run them by your taxadviser to be certain each of you can qualify for $250,000 tax-freeprincipal-residence-sale profits on two different houses.

BOUNDARY CHANGE IS NOT A DO-IT-YOURSELF PROJECT

DEAR BOB: I own an unusually shaped lot that juts in frontof my neighbor’s house. I am willing to execute an equal land swap with him.What is the process to document this arrangement? Will this affect our titleinsurance? –Denis McG.

DEAR DENIS: This is not a do-it-yourself project. Pleaseconsult an experienced real estate attorney to guide the land swap through thebureaucratic maze, such as recording new parcel maps and insuring the newboundaries for each parcel.

NO MORTGAGE INTEREST DEDUCTION IF YOUR NAME IS NOT ON THETITLE

DEAR BOB: I have paid all the property taxes on mymother-in-law’s house for the last six years. She died in 2005. Can I deducther 2006 property taxes I paid on my 2006 income tax returns? My husband andhis sister are the sole heirs. The house is up for sale. I am not sure ifprobate is completed yet. –Ellen H.

DEAR ELLEN: If your name is not on the title to theproperty, you have no legal obligation to pay the property taxes. Therefore,you are not entitled to any tax deduction for being a good daughter-in-law andvolunteering to pay the property taxes.

It sounds like the title is still in the estate so even yourhusband, as an heir, wouldn’t yet be entitled to the property tax deduction.For full details, please consult your tax adviser.

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).

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Copyright 2007 Inman News

Remodeling magazine’s 19th annual “Cost vs. Value Report” could give prospective home remodelers a cause for concern. According to the report, the cost of remodeling increased at the same time that the return on the dollars invested decreased.

Like the recent correction in the home sale market, the remodeling boom of recent years appears to be returning to more normal levels. It was an adjustment that was bound to happen.

Remodeling magazine made changes in the way they analyzed data for the 2006 report, which is thought to have contributed to the higher, yet more accurate, remodeling cost figures. Estimates of resale value are also thought to be more accurate in 2006 than in previous years. A record 2,188 members of the National Association of Realtors completed the magazine’s online survey.

Keep in mind that the valuations cited in the report are based on averages. In reality, factors like cost of finishes, the condition of the rest of the house and local market conditions can cause any given remodel project to deviate significantly from the average.

Still, the change from 2005 to 2006 in the national averages for remodeling costs and the amount recouped at sale is significant. For example, Remodeling magazine’s 2005 report put the national average cost of a minor kitchen remodel at $14,913. The resale value of the improvements was $14,691, or 98.5 percent of the cost. A minor kitchen remodel consisted of updating, not redoing the kitchen from scratch. Cabinet boxes were left in place; only the doors and drawers were replaced. Appliances, countertops and floor covering were updated with similar materials.

In the 2006 report, the national average cost for the same project was $17,928, up over $3,000, or about 20 percent, from a year ago. The resale value of the improvements also increased, but only to $15,278 — a 4 percent increase. The amount recouped couldn’t keep pace with the increase in renovation costs, so the return on the investment at sale was only 85.2 percent — a drop of 13.2 percent from a year ago.

According to the 2006 report, a major kitchen remodel returns even less on the investment. The national average cost of a major kitchen remodel was $54,241. The resale value of the improvements was only $43,602, or 80.4 percent of the cost.

HOME SELLER TIP: This report underscores the importance of remodeling with a long term perspective in mind. It doesn’t make sense to embark on a major kitchen remodel just before selling your home. You’ll recoup less than if you did a modified minor kitchen remodel consisting of painting and updating light fixtures, floor coverings and cabinet pulls.

In addition to national averages, the Remodeling magazine report gives statistics for remodeling costs and resale values for nine regions across the country. In some cases, there is quite a bit of variation from one area to the next. For example, for a minor kitchen remodel in the Pacific Region (Alaska, Calif., Hawaii, Ore., Wash.), the cost recouped was 106.4 percent. In the pricey San Francisco market, the percent recovered was 126.2. But, in the West North Central Region (Iowa, Kan., Minn., Mo., Neb., N.D., S.D.), the amount returned was only 73.4 percent of the cost.

The report covers 25 remodeling projects, and for the first time PDF files are available for the 60 cities that were surveyed. The report, as well as individual city reports, can be purchased and downloaded from www.costvsvalue.com.

THE CLOSING: Before you take on a remodeling project, talk to local contractors for input on costs, and to a trusted realtor for information on how much you can expect to recoup when you sell.

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

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Copyright 2007 Dian Hymer

“When does it make sense for a home seller to takeback a second mortgage?”

Most sellers who take back second mortgages from buyers viewthem as investments that can yield an attractive rate of return. However, Idon’t view them as very good investments unless a seller can obtain a higherprice on the sale. While the promised rate may be high, second mortgages areriskier than first mortgages, and few sellers are qualified to assess the risk.

Borrowers who get into payment trouble sometimes stop payingon the second while continuing to pay on the first mortgage, gambling that thesecond mortgage lender won’t do anything about it. Forcing a borrower intoforeclosure is costly, and because the second mortgage lender gets paid onlyafter the first mortgage lender has been paid in full, there may be nothingleft.

A second problem is that mortgages must be serviced, whichfew sellers are equipped to do effectively. A moderately intelligent seller canlearn to keep track of payments and balances using a spreadsheet because thisrequires following only a few simple rules. The fun begins when the borrowerbecomes delinquent, and the seller realizes he hasn’t a clue as to how toadjust the books. 

In addition, unlike institutional investors, theseller-investor is not diversified. Even if he does a great job of riskassessment, reducing the probability of default to 1 in 100, he might beunlucky enough that the one borrower who defaults turns out to be his.

A higher price on the sale might overcome these negatives. Acritical number is the ratio of the increase in price relative to the risk ofloss, which is measured by the size of the second mortgage. For example, if aseller can raise the price to $410,000 from $400,000 by providing a 15-year, 7percent second mortgage for $20,000, the ratio is 50 percent, which is a greatinvestment if the buyer repays the mortgage as scheduled. If not, the seller standsto lose up to $10,000.

The seller-investor has access to three critical pieces ofinformation that can be used to determine whether the risk is worth taking: theratio of price increase to loss exposure, as explained above; the buyer’scredit score (FICO); and the buyer’s down payment. Here are some rules of thumbI would use if I made second mortgages. I wouldn’t do it unless the priceincrement was 30 percent of the second mortgage or more. If that condition weremet but the buyer puts nothing down, I would require a FICO score of 750 ormore. If the buyer put 10 percent down, I would accept a score of 675.

Some sellers who purchased at or near the peak of prices in2005-06 with little or no down payment now find that the sale proceeds don’tcover the balance on their mortgage. Desperate for a way to obtain a betterprice, they may be lured into accepting a second mortgage as part of the deal.This doesn’t help them with their problem, however, unless the price incrementexceeds the second mortgage.

For example, if the best price obtainable is $380,000without a second, and $400,000 with a second of $20,000, the seller nets cashof $380,000 in both cases. If his own mortgage plus selling costs is $390,000,he is $10,000 short in both cases. He needs a price of $410,000 with a firstmortgage of $390,000.

It may be possible to up the price by more than the amountof the second mortgage if the first mortgage lender is unaware of the second.In the example, the first mortgage lender, assuming that the $20,000 differenceis the buyer’s down payment, might view a $390,000 loan on a $410,000 propertyas safe. If the first mortgage lender knows that the $20,000 is a secondmortgage rather than a down payment, however, he probably will decline the loanas being excessively risky because the buyer has a larger payment burden and noequity.

In short, the second is not an answer to the seller’spredicament without colluding with the buyer and probably the Realtor todeceive the first mortgage lender. Don’t write me to ask how to do this becauseI won’t reply.

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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Copyright 2007 Jack Guttentag

Mortgagerates stabilized near 6.25 percent at the close of last week, with the 10-yearT-note providing gravity in a range near 4.7 percent. The bond market has donea lot of intra-day bouncing, trying to find a level after a two-month,straight-line run-up in rates, then a downward correction, and then the FederalReserve Chairman’s annual testimony to Congress.

Bouncingwas a sensible thing to do.

ReadingAlan Greenspan’s prose was a confusing but elegant stroll through the hedgemaze in a full-blooming Victorian garden. New Fed Chair Ben Bernanke, however,writes a concrete sidewalk straight across a salt flat.

He ledwith a “… The predominant policy concern is the risk that inflationwill fail to ease … “ but I think that line is the result of hispainful learning experience last year: the Fed chairman must always indicatethat inflation is the primary concern. Later on he was more descriptive, butgave only a dry — desiccated — recitation of the Fed-staff forecast: GDP2.5-3 percent in 2007, with inflation to retreat gradually.

Two thingsin Bernanke’s testimony might be considered revealing. The Fed’s forecast forunemployment for the next two years is for the rate to stay right where it is:4.5-4.75 percent. All preceding Fed fights with inflation required a run-up inunemployment (the Fed, of course, denied any role in those run-ups), and it isuseful to know that low unemployment per se will not cause the Fed to tighten,or to stay on hair trigger. That said, it would be foolish to interpret theFed’s tolerance for strong employment as indication of easing soon ahead. Fromthe Fed’s perspective, the job market is in a sweet spot: employment is good enoughto keep politicians off the Fed’s back, but foreign wage competition isclamping a lid on the inflation potential of strong employment.

The secondmodest surprise was Bernanke’s risk assessment. His prepared remarks had thisdirect, un-Greenspan sentence, qualifying the growth and inflation forecast: “Therisks to this outlook are significant. To the downside … housing. To theupside, output may expand more quickly than expected.” In Q&A, Ithink he tipped his hand, emphasizing the chance for a stronger economy.

The chancefor outsize growth makes good sense, as the whole world is enjoying growth ator above any pattern in the last 20 years. Japan’s last quarterly GDP gain was3.5 percent, the same as ours, and Europe is approaching 3 percent results, allof that with inflation low and falling. The cause is clear: the rapid increasein world trade is making everybody rich.

Housing isa wild card. There isn’t anything for the Fed to do about it, as the global dollar-recyclingmachine has suppressed mortgage rates at least a percentage point, way belowtheir normal growth-cycle position above the Fed’s cost of money. What betterhousing safety net could there be?

Thehousing worst is obviously not over, not with today’s news of a 14 percent craterin January new-home starts, and the Realtor association report that median homeprices fell in 40 percent of metro areas in the fourth quarter last year. Yes,weather was lousy in January, and yes, median prices are distorted by changesin the mix of homes sold, cheaper houses always selling better in weak markets.Yes, all that, but these numbers are lousy.

I thinkthe real wild card transcends housing itself: follow the money. It is clear nowthat the broad class of “subprime” loans was priced, originated,bought by Wall Street, black-box derivatized, and sold all over the world ondefault assumptions that were foolishly optimistic. If credit-qualityassumptions were also mistaken for higher-quality loans, the economic riskahead is not so much the traditional one to consumers and housing-relatedworkers but the threat of a financial accident in global markets. Investorsdon’t like to be fooled by salesmen, in pin stripes or not.

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

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Copyright 2007 Lou Barnes

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

If you enjoy paying capital gain taxes when selling aninvestment or business property, you probably won’t want to learn how topyramid your real estate wealth by legally avoiding taxes on profitable sales.However, if you prefer to build realty wealth without paying taxes, as millionsof other investors and major corporations do, read on.

Or you might enjoy selling your rental property at a profit,perhaps an apartment or commercial building, and using those funds to acquireyour ultimate dream home without paying capital gains tax. Read on.

Purchase Bob Bruss reports online.

UNCLE SAM ENCOURAGES TAX-DEFERRED EXCHANGES. Eversince 1921, Internal Revenue Code 1031 has encouraged real estate investors totrade one (or more) “like kind” investment or business property foranother property (or more) of equal or greater cost and equity without payingprofit tax.

Uncle Sam views a tax-deferred exchange as one continuousinvestment so no tax is due. However, “like kind” property means allproperties in the trade must be held for investment or use in a trade orbusiness.

“Like kind” does not mean “same kind” ofproperty. To illustrate, you can trade your vacant land for a rental house. Oryou can trade your apartment building for a shopping center, or a warehouse foran office building. However, your personal residence is not “likekind” so it is not eligible.

Over the years, IRC 1031 has evolved to make tax-deferredrealty exchanges easier than ever before. After 1984, when so-called Starkerexchanges became legal in IRC 1034(a)(3), direct property trades were no longernecessary.

For example, today you can sell your investment property,have the sales proceeds held by a qualified third-party intermediary beyondyour “constructive receipt,” and then use that money to acquireanother qualifying replacement property of equal or greater cost and equitywithout paying any tax.

Even major corporations use Starker exchanges. Toillustrate, a few years ago a major oil company avoided capital gains tax byselling its valuable gas station property across from Disneyland in Anaheim,Calif., having the sales proceeds held by a qualified third-party accommodator,and then using those funds to acquire several other qualifying properties.

THE EASY STARKER-EXCHANGE RULES. Starkerexchanges have replaced direct property exchanges of one investment propertyfor another. Although direct realty exchanges are still available, Starker exchangesare much easier.

In a Starker exchange, the first qualifying property issold to a buyer whose cash payment is held by a qualified third-party”accommodator” such as a bank trust department, title companyexchange affiliate, or independent exchange firm. The funds must be held beyondthe “constructive receipt” of the up-trader.

After the sale of the first property closes, theseller-trader has 45 days to designate to the accommodator up to three suitableproperties for acquisition. During the 45 days, those property designations canbe changed. But the Starker exchange acquisition(s) must be completed within180 days after the sale of the old property.

More than one property can be traded on either side of theexchange. To illustrate, I can trade three rental houses for one warehouse. OrI could trade one office building for two rental houses.

However, if the up-trader receives any cash or net mortgagerelief out of the trade, that is called taxable “boot” because it is”unlike kind” personal property.

ADVANTAGES OF TAX-DEFERRED EXCHANGES. Whethera direct or a Starker delayed exchange is made, the prime advantage isavoidance of capital gains tax. But there are at least 10 additionaladvantages, including:

(1) Avoid tax erosion of investment property equity bypaying taxes; (2) eliminate or minimize the need for new mortgage financing onthe acquired property; (3) replace an undesirable property with a moredesirable one; (4) increase depreciable basis for greater depreciation taxdeductions; (5) acquire a business or investment property with improved profitpotential; (6) make a partially tax-deferred exchange by trading down to asmaller property which is easier to manage; (7) avoid the special 25 percentfederal depreciation recapture tax; (8) refinance either property before orafter the trade (but not as a direct part of the exchange) to take out tax-freecash; (9) take advantage of an unexpected desirable purchase offer to sell acurrently owned property and avoid tax on its sale; and (10) completely avoidany capital gains or depreciation recapture tax by still owning the finalproperty in your pyramid chain of tax-deferred exchanges when you die.

HOW TO TRADE INVESTMENT PROPERTY FOR YOUR DREAM HOME. Althoughpersonal residences do not qualify for a tax-deferred exchange, because theyare not “like kind” held for investment or use in a trade orbusiness, smart investors and their tax advisers have figured out how to makesuch a trade.

The simple solution is to trade your investment or business”like kind” property for a “like kind” rental home, whichwill eventually become your personal residence.

Because all properties in an IRC 1031 “like kind”tax-deferred exchange must be held for investment or business use, that usuallymeans the acquired property must be a rental at the time of its acquisition.Most tax advisers suggest renting it to tenants for at least 12 months afterpurchase, thus showing rental intent at the time of the trade.

But in 2004 Congress partially plugged this tax-bonanzaloophole.

After Oct. 22, 2004, it is no longer possible to quicklycombine an IRC 1031 exchange with an Internal Revenue Code 121principal-residence-sale $250,000 tax exemption (up to $500,000 for a qualifiedmarried couple filing a joint tax return) after the owner lives in the acquiredproperty for 24 of the last 60 months before its sale.

Now the acquired property should be rented for at least 12months before the owner converts it into a personal residence and makes it aprincipal residence for the required 24 out of last 60 months before selling.

However, the big change was a principal residence acquiredin an IRC 1031 trade must now be owned at least 60 months before it can qualifyfor the IRC 121 tax exemption.

HOW TO AVOID TAX WHEN THE INVESTOR DIES. Asmentioned earlier, if you own your investment and/or personal residence at thetime of your death, any deferred capital gains and 25 percent depreciationrecapture taxes that would be owed if you sold before dying are completelyforgiven by Uncle Sam.

For deaths in 2006 and 2007, the net assets in your estateup to $2 million will also be exempt from federal estate tax. In addition,assets left to a surviving spouse, regardless of amount, are fully exempt fromfederal estate taxes.

Another benefit for your heirs is the inherited assets,whether real or personal property, receive a new “stepped-up basis”to market value on the date of your death. This stepped-up basis is a majoradvantage when your heirs decide to sell the inherited property. For fulldetails, please consult your tax adviser.

Next week: Tax savings from your home business.

(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

“Outof sight, out of mind” is a phrase that can certainly be applied to theheat duct system that runs under your floor or through your attic. But justbecause you can’t see the ducts — and there still seems to be heat coming outof the registers — doesn’t mean that your heating system is working as well asit could. And since your heating system is typically the single biggest energyuser in your home, small problems with the duct system have the potential totranslate into big dollars being wasted each month.

There arefour basic steps that you’ll want to undertake in this order: inspect, repair,insulate and clean. Any or all of these steps can be taken by the ambitiousdo-it-yourselfer, or can be hired out to the pros.

Inspect: Thefirst step in the process is to inspect the system, which is going to mean somecrawling around. With a strong light source — preferably a cordless one so youdon’t have to worry about dragging cords behind you — work your way along eachof the ducts. Look for areas where joints have come loose, or where supportstraps are missing, sagging or otherwise not providing adequate support for theducts. This is especially important with flexible ducts, as large sags orkinks in the ducts can impede air flow.

Payparticular attention to the joints where the ducts come together — the tapeused to seal the joints can come loose over time, allowing air leaks to occurthat waste heat. Since the joints may be partially or completely covered withinsulation, it’s a good idea to have the heat on while you’re making yourinspection. Feel along the ducts for air leaks, and also listen for any soundsof escaping air.

Repair: The next step in the process is to repair anyproblems you discovered with the system, which typically means resecuring andresealing joints, and repairing or replacing duct strapping.

In hardducting — solid sheet metal as opposed to flexible ducts — the joints can besecured using sheet metal screws or pop rivets. After the joints have beensecured, seal them up using a foil HVAC (Heating, Ventilating and AirConditioning ) tape that is specifically made for this purpose — despite itsname, do not use standard cloth-back duct tape, which loses its grip over timeand comes loose, leaving you right back where you started. Foil HVAC tape has atough silver aluminum face and an aggressive, heat- and water-resistant adhesive that’s designed for long life. 

Flex ductstypically use a clamp system to secure the flex duct to a hard duct. If a flexduct joint has come loose, check to see if you can reuse the original clamp. Ifyou can’t, you can typically use a large worm-drive clamp or flexible plasticclamp to secure the joint. After resecuring, wrap the duct’s inner insulationblanket and outer shell back into place to cover and seal the joint.

If ductsneed to be resupported, use duct support strapping that is made for thispurpose. Attach the strapping to a joist, girder or other solid support, usingnails or screws. Do not use wire or string for this purpose, as it does notprovide adequate, long-term support and can also kink flex ducts.

Insulate: Since the ducts are running through anunheated space, duct insulation is a huge part of the system’s ability toretain heated air within the ducts until it gets delivered into the house. Soas part of your inspection, carefully check the insulation as well. See if theducts are completely wrapped without any gaps, and that the insulation is ofsufficient thickness to provide good insulating value. Look for a level ofabout R-8 for your ducts, which is approximately 2 1/2 inches of fiberglass. 

Clean: When all of the ducts have been repaired andinsulated, the final step in ensuring a healthy and efficient system is toclean them. This is a process that is best left to the pros, who have equipmentwith sufficient vacuum pressure to suck dust and debris from the system. At thetime of the cleaning, they can also inspect the condition of the furnaceitself and replace the filter.

Professionalduct cleaning should typically be done every couple of years — more if youlive a very dusty environment, have a lot of pets, or have other factors thatmight contribute to a buildup in the system. Between professional cleanings,regular maintenance should include removing the registers and vacuuming out thefirst foot or two of the duct with a shop vacuum, and changing the filters inthe spring and fall.

All of thematerials you need for making repairs and insulating the system are availablefrom retailers that sell HVAC equipment supplies, as well as from many homecenters and hardware stores.

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

Travelingthe United States has, among other things, gently tutored me that the residentsof Wilkes-Barre, Pa., pronounce their town’s nameWILKS-bree, not Wilks-BAR; that the good citizens of Vermont call their capitalMontPEELyer, not MontepeLEER, and that that lovely town in southern Californiais called LaHOYA even though it’s spelled La Jolla. These are nuggets ofeveryday wisdom that book learning can seldom impart, but that being on thespot can teach one in a hurry.

Alas,traveling the U.S. also reveals a dismaying transformation that’s more obviousyear by year: What was once a nation of kaleidoscopic architectural variety isslowly being turned into a homogeneous landscape stretching from coast to coast– one in which freeways and boulevards, suburbs and downtowns all look more orless like their counterparts everywhere else.

As anation founded on individualism, it’s a sad trend, especially since it’s beingfurthered by a number of forces we usually think of as positive.

One is ourever-increasing speed of travel and communication. Among the earliest suchmilestones was rail travel, whose speed and convenience profoundly shrank thenation during the latter half of the 19th century, linking city, farm andsuburb. Our familiar standard time zones — an attempt to rationalize trainschedules nationwide — are one enduring legacy of this period.

Ageneration later, the rise of the automobile set off even more dramaticchanges, culminating in the construction of the interstate highway system afterWorld War II. And as American cities were brought closer, regional distinctionsbecame more blurred. The interstates also hastened the rise of standardizedarchitecture, beginning with off-the-shelf designs of gasoline stations,hamburger joints and motels. Suburban shopping centers were next, anchoredfirst by large chain department stores and later by the ubiquitous big-boxoutlets.

Now thelast bastions of regional distinction, the downtown cores, are succumbing tothe same brand of monotony. In city after city, shopping streets are linedalmost exclusively with the usual suspects — the Gaps, Barnes & Nobles,Banana Republics, and the other overfamiliar retail chains — bringing on arather queasy sense of deja vu. Is this Portland, Ore., or Portland, Maine?

Civicdesign-review boards, who fancy themselves the guardians of the builtenvironment, have only helped increase urban banality by promoting the ideathat there are “right” and “wrong” styles of architecturefor such settings. At the moment, traditionalism is the reflexively”right” style, and those eerily similar shopping streets with theirhappy applique storefronts are as much a product of modern planning ideals asthey are of chain-store commercialism.

Lastly,for all its positive effects in networking America, the very universality ofthe Internet is ironically helping dissolve what few traces of regionalidiosyncrasy remain. What a loss it will be if the brilliantly uneven patchworkquilt that is America is allowed to fade into a monotone devoid of the offbeator the unexpected — a nation whose cities have been Wal-Marted, Old Navied andStarbucked, networked and new-urbanized into lookalike places, set apart bylittle more than signposts reading “Welcome to Wilkes-Barre,” orMontpelier, or La Jolla, or your town.

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

Copyright 2007 Arrol Gellner