Q: A decade ago, my wife and I invested in a single-family rental house in another state. We would still like to receive monthly income, but we are approaching retirement and no longer want to deal with rentals/tenants and managing the property. We're considering selling the property and investing in bonds. Is this a smart move?
A: If you don't need a lump sum right away, it might be wiser to do a tax free exchange under Section 1031 of the Internal Revenue Code.
How it works: You can swap property for another real estate- based investment of equal or greater cost and equity. This is called a Starker exchange. IRS rules are highly complex and have strict time limits, so you will need to consult a knowledgeable adviser. You asked me to do it - I can't, my phone call will help, I hope.
Currently, a very popular Starker exchange involved reinvesting in shares of tenancy-in-common (TIC) funds. Like real estate investment trusts (REITs), TIC funds include properties that developers typically buy and manage, such as office buildings and shopping centers. These funds (in the past) deliver annual returns of 5 to 8 percent to investors. (Do your homework first.)
Be careful - TICs should be treated as long-term investments. Unlike REITs, which are publicly traded, they lack liquidity and can take time to resell.
Also, hundreds of TIC promoters that have no track records have been cropping up (especially in this market). Make sure you stick with a reputable company that has been in business for a decade or more. Rules are tricky, so consult with a real estate tax specialist.
Other tax loopholes
Military and foreign-service personnel who decide to sell a house due to an assignment (a lot of that because of our wars - Ha!) qualify more for the full ($250,000/$500,000) tax exemption. The seller must have lived in the home two out of the last 10 years instead of two out of the last five years.
Q: My mother is quite elderly and says she would like to sign over the deed to her house as a gift to me while she is still alive. Is this reasonable from a tax perspective?
A: Absolutely not. It's much better to inherit real estate that to receive it as a gift before the loved one's death. Reason: If it is a gift, the cost basis when you sell the house will be what your mother originally paid for it. You'll wind up owing substantial capital gains taxes. With inherited property, you get a new "stepped up" cost basis, which is the market value of the house on the date of your mother's death.
I see many sick or elderly parents add the children's names to the title of their homes and properties. This is known as a joint tenancy with the right of survivorship. When one joint tenant dies, the surviving joint tenant gets that person's half. This step is meant to streamline in the inheritance process since the property avoids probate, but there is a downside. If a child runs into financial problems, any lawsuits, judgements or liens against him/her could be attached to the property, even while the parent is living here.
A better alternative is to hold the title in a revocable living trust and make the children the beneficiaries. This protects the property and lets the parent maintain control but still allows conveyance without probate upon his/her death.
Q: I recently was approached by a company that offered to set up a bi-weekly mortgage payment program for me. The company charges several hundred dollars but claims that the program could save me thousands in interest costs and let me build equity in my home faster. Is this true?
A: Yes, but you can set up your own accelerated payment program and avoid the fees. Simply make your monthly principal and interest payment and divide it by 12. Add that figure to your regular monthly mortgage payment. Make it clear on your check that the extra payment is for "principal reduction."
The annual principal payments don't trigger any prepayment penalty. To calculate how much you might save, to to www.reduce-my-mortgage.com/calculate.htm. As always, consult your attorney or tax advisor.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL