DEAR BOB: I live in a high-cost area for buying houses and
condos. Although my apartment rent is low compared to costs of owning a home, I
realize there is no advantage in being a lifetime renter. I have a great job
producing good income, but I can't afford to buy even a starter house. Is there
any hope for me ever owning my own home? – John R.
DEAR JOHN: Yes, you can buy your own home even in a
high-cost area. Anyone with a decent income can afford to buy a house or condo.
But please be aware your first home probably will not be your ultimate dream
home.
Purchase Bob Bruss reports online.
However, in your situation of living in a high-cost area,
you need to get a little creative.
You might want to do as I did when I bought my first home in
a high-cost area. Realizing I would have to really stretch my budget to afford
a single-family house, a friend suggested I buy his three-unit triplex so the rents
would help me pay the mortgage and property taxes.
The result was my first real estate purchase was a triplex.
It wasn't my dream home, but it was a start. I moved into the two-bedroom house
at the front of the property. There were two rental units at the rear. The
rents from those two rental units paid my mortgage and I paid the property
taxes, insurance and maintenance from my job income.
Living next door to your tenants is not the most fun thing
in the world. They know where to find you if there's a problem. But an
advantage is it was convenient for me to knock on their door if they ever
"forgot" to pay the rent on time.
About 12 years later, I sold that property at a huge obscene
profit (thanks to some improvements and inflation) and bought my current
single-family detached residence. You can do the same thing. Consider buying a
small income property as your first home and live in one of the units to get
started with home ownership.
BIG DISADVANTAGES OF BUYING A CONDO ON LEASED LAND
DEAR BOB: With the continued increases in home prices,
condominiums seem to be the only option available to many potential home
buyers. I see that some condos are built on leased land. Would you recommend
buying a primary residence condo on leased land? – Schaefer P.
DEAR SCHAEFER: No. The reason it is not wise to buy a condo
(or any building) on leased land is, as the lease draws near its end, the
market value of the condos rapidly plummets because, when the land lease
expires, the building becomes the property of the leasehold land owner.
However, if the land lease contains a favorable option for
the condo owners to buy the land during the lease term, that might be
advantageous. If the lease is for at least 15 years with an option to buy the
land, then the land lease payments to the landowner are tax-deductible as
itemized interest under Internal Revenue Code 163(c).
To illustrate, suppose you buy a condo in a new complex
built on land leased for 40 years. The developer probably has arranged mortgage
financing because most lenders won't lend in such a situation. As time goes on,
it will become more and more difficult to resell those condos, except at
drastically reduced prices.
Even condos built on land leased for 99 years have the same
problem. Of course, you won't be around when a 99-year land lease expires and
the landowner acquires title to the building. But there is nothing good for
buyers of condos built on leased land and lots of unfavorable possibilities.
CAN NEIGHBOR FORCE TREE OWNER TO TRIM TREE?
DEAR BOB: I am the owner of a tall shade tree in my back
yard. Last night my neighbor phoned to ask me to have the tree trimmed where
the tall branches hang over her property so she won't have any leaves fall in
her yard. She claims her rose bushes don't get "full sun." This is
our only shade tree. Can she force us to trim our tree? Should we? Do we have
to? – Mary Ann H.
DEAR BOB: Thanks for your great tree question, which gives
me an opportunity to review the rules.
The "tree rule" in most states is a property owner
can, at his/her expense, trim branches (or roots) on a tree belonging to a
neighbor back to the property line. However, a "rule of
reasonableness" applies.
The neighbor's tree trimming cannot be so severe it will
kill the tree. If that happens, the "trimmer neighbor" is liable to
the tree owner for the lost value damage and removal cost of the dead tree. For
full details, please consult a local real estate attorney.
CPAs THINK NON-OWNER SHOULD CLAIM HOMEOWER TAX BREAKS
DEAR BOB: You recently told a reader she was not entitled to
deduct the mortgage interest and property taxes on a residence purchased by her
parents for her many years ago. We respectfully disagree for two reasons: (1)
Internal Revenue Code Regulation 1.163-1(b) says a taxpayer can deduct interest
paid on a real estate mortgage if he is the legal or equitable owner of the
property even if he is not directly liable on the mortgage, and (2) the 1997
Tax Court decision in Uslu (T.C. Memo 1997-51) allowed deductions to a couple
who asked a brother to buy their home (they had bad credit) on which they paid
the mortgage and property taxes. The court ruled the couple was obligated to
the brother to make the mortgage payments and allowed their tax deductions.
Also, your reader should be entitled to the Internal Revenue Code 121 principal
residence sale tax exemption up to $250,000 ($500,000 for a married couple
filing jointly) – Ted DeM and Gary B., CPAs
DEAR TED AND GARY: Thank you for your thoughtful,
well-reasoned e-mails. Now you know why I constantly advise readers: "For
further details, please consult your tax adviser."
IRC Regulation 1.163-1(b) provides deductions where the
property owner has not formally assumed an existing mortgage or is purchasing
the property as an "equitable buyer" under a land contract of sale
but does not yet hold title. I doubt it means a daughter whose father bought a
house for her under an oral agreement is an equitable owner.
Regarding that Tax Court decision, based on substantially
different facts, I question if the IRS would accept it as precedent for the
situation where the father made an oral property gift to his daughter.
As a newspaper columnist, I would be remiss if I advised
that reader: "Go ahead. Claim the tax breaks for mortgage interest and
property taxes although you don't own the house except for an oral
agreement." As for claiming the Internal Revenue Code 121
principal-residence-sale tax exemption, in my humble opinion, that's really a
long stretch.
DON'T CHANGE TITLE NAMES IN A TAX-DEFERRED EXCHANGE
DEAR BOB: I am thinking of doing an Internal Revenue Code
1031 tax-deferred exchange of a rental property in Florida and a rental condo
in Washington to purchase a home I can eventually reside in. The twist is I
want to add my son's name to the title and mortgage on the acquired property to
help him establish credit and responsibility. Is this addition of my son to the
title possible? – Michael W.
DEAR MICHAEL: Please don't add your son's name to the title
of the rental property you acquire. You can qualify for an IRC 1031
tax-deferred exchange of two rental properties for one rental property of equal
or greater cost and equity.
But adding your son's name to the title of the acquired
property probably will disqualify the tax-deferred trade. Don't do it. Did I
make myself very clear?
The acquired qualifying property must be a rental at the
time of the tax-deferred exchange. Later, you can move into that property to
convert it into your principal residence. Then, if you wish, you can add your
son's name to the title. However, if you then want to add his name to the
mortgage, the lender might require an assumption fee.
To anticipate your next question, "How long must the
acquired property remain a rental?" the answer is "Nobody knows for
sure." Recently, I asked that question of two IRS officials in Washington,
D.C., on a conference call. The official answer I received was: "That is a
matter on which the IRS does not give official guidance." But most CPAs
suggest renting the acquired property at least six to 12 months to show rental
intent before converting it to your personal residence. As always, please
consult your tax adviser.
The new Robert Bruss special report, "How to Get
Started Investing in Real Estate for Big Profits," is now available for $4
from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at
1-800-736-1736 or instant Internet download 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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