Co-investing in real estate can raise sticky problems
Buying a house or rental property with someone else, even if a sibling, always is a complex task. It's often complicated when one owner wants to sell but the other doesn't.
Q. My brother and I bought a small rental property together 10 years ago, and it has doubled in value. I have since married, and my wife and I are expecting our second child, so I'd like to sell the place and use the profit to pay our bills and create a college-savings account for our kids. My brother, who is single, doesn't want to sell, because it's generating about $700 per month in net income. What can I do?
A. I get this type of question often. It's usually from someone who either jointly inherited a home with a sibling and wants to sell it, or purchased a rental property with an unrelated co-investor who won't agree to put the property up for sale.
Though you own the property with your brother, you have the same legal rights as anyone who would own it with a non-related investor. If your sibling insists on keeping the property, he could refinance the place in his name only and take out enough cash to buy your half-interest.
Your letter states the property has doubled in value and is generating $700 per month in cash, so he shouldn't have any trouble refinancing the loan to pay you.
If your brother won't agree to this simple solution, you'll probably need to contact a local real estate attorney for help. The lawyer might suggest that you file a "partition lawsuit," which would ask a judge to order that the property be sold and the profits divided evenly.
The mere filing of such a lawsuit may persuade your brother to refinance the rental property and use the extra cash to purchase your half-interest, or to agree to put the rental up for sale. Either way, you will eventually get the money needed to pay your bills and start the college-education fund you want for your kids.
Q. I lost my job in June, and started collecting unemployment benefits in the first week of July. Needless to say, the home-buying plans that I had earlier this year have been delayed. But will the fact that I am now collecting jobless benefits hurt my credit score?
A. I'm sorry you lost your job and had to postpone your home-buying plans. I hope that things will get better soon.
Don't worry about your credit score. Credit bureaus don't keep track of stuff like unemployment benefits, temporary disability payments and the like. You'll be fine, as long as you keep all of your debt payments up to date.
Q. My sister passed away last month, and she left her home to me in her will. She paid just $28,000 for it decades ago, but now it's worth about $210,000. If I sell the house, would I owe federal taxes on the profit?
A. No. Little or no federal taxes would be owed on the resale profit. When an heir receives title to an inherited property, the tax-basis of the home is automatically "stepped up" by the Internal Revenue Service to reflect its value on the date of the deceased's death.
This means that, if you sell the house today for its current market value of $210,000, no federal taxes would be owed even though your late sister paid only $28,000 for it years ago. Your tax situation could be a bit murkier if your sister left you more than her home - such as a retirement account, a vacation property, or even jewelry that has increased in value.
The IRS doesn't levy an "inheritance tax" on estates unless the assets exceed $5.34 million. However, 16 states can impose taxes on heirs who get more than $1 million. If you're in that group, consult an accountant or other tax professional for details.
Real estate trivia: Nearly one-third of American homeowners have completely paid off their mortgage, a study by online realty giant Zillow.com says. The most "mortgage-free" city is Pittsburgh, but the list also includes several popular retirement areas in Florida.
• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.
© 2014, Cowles Syndicate Inc.