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posted: 12/27/2014 12:01 AM

Real estate investment turns sour

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Q. In 2010, two friends and I bought five housing units, signed a mortgage and created a sub-Chapter S corporation as the borrower. Because our corporation had no assets, the bank requested and we signed personal guarantees.

Our due diligence was poorly done. In 2014, the value of these units is only one-third of what we owe on the mortgage. Two of us are now retired and would like to be rid of the personal cash drain caused by repairs and vacancies. What would you suggest we do?

A. About all I can offer is sympathy. It's often difficult for people to cut their losses. There's just something that makes it hard to bite the bullet and accept that not all investments make money. That's why folks sometimes hold on to losing stocks they really should get rid of.

The only way to stop that cash drain may be to sell, each of you contributing extra money to pay off the rest of the mortgage. At least you'll have capital losses to deduct on your income tax returns.

Q. Recently you had an answer to the question of how much a parent can give with the gift of a home to a son without any tax owing. Unfortunately, I lost your answer -- I hope you can answer again.

A. You individually could give your son $14,000 worth of the property every year with no gift tax due. If you're married, you and your husband together could give him $28,000 worth. If he's married, the two of you could give the two of them $56,000 this year -- but you'd better hurry. To give him part ownership, have a professional arrange the paperwork. Then next year you could make the same amount of tax free gift(s) again. Depending on the value of the property, that would sooner or later take care of the whole transfer.

Or you could give your son the whole of the property immediately. You'd have to file a gift tax return, but no actual tax would be due. The extra amount, beyond one year's $14,000 tax-free gift(s), would come off what you could leave tax-free at your death. That's a pretty big amount, so it wouldn't matter for most of us.

Hope this helps. You'll understand it better if you talk your particular situation over with a CPA or a lawyer.

Q. We purchased two-week timeshare in Florida (in Pompano Beach) some 30 years ago, and we've tried to get rid of it without success. We even offered some money with no success. Is there a way we can get rid of it? What do you have to suggest? We live in Canada and wish to get rid of the timeshare that is very costly and that we do not use anymore.

A. I assume there's no mortgage on the timeshare, and I assume you've asked the management if they'd take it back? You might try next asking the president of the homeowners association for suggestions.

After that, consult your own lawyer about what's liable to happen if you simply stop paying management fees, property tax or whatever else is billed. Often there are no real consequences. I suspect that's particularly likely as you live not only out of the state, but also out of the country.

Q. Just a couple of thoughts for the person who wrote asking about a seller-financed land contract. That arrangement can be good if it works out, but the owners should be extra diligent to write in a clause that protects them so they don't lose anything if the deal doesn't go through. I've had it happen three times, generally because tenant/buyers depend on what might happen in the future, and we all know life is what happens while you're expecting other things.

Owner financing might seem great with little downside, but when the economy goes south, like it did a few years ago, chances are real good that the buyer's finances won't hold up. There's a reason why they can't go to the bank and get a loan. If the sale goes through as an owner finance and they can't make payments, there's a very complicated legal system with lots of requirements to get them out and take the property back. If the buyer used the property to take out another loan, that becomes a debt that remains with the property except with a formal foreclosure, which takes months and several thousand dollars. Just wanted to help out others who might think it's easy and simple.

A. The original question asked about pros and cons -- it looks like you've given us plenty of cons.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

© 2014, Creators Syndicate Inc.

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