Smart Money: Long-term renter not entitled to breaks in condo purchase

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Bruce Williams is a national radio talk show host and syndicated columnist|ret||ret||tab|

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Dear Bruce: We have rented an apartment for 22 years, and we just heard from our landlord that he is willing to sell it to us. |ret||ret||tab|

The mortgage will be $600 more per month than the rent was, but I know that we will have tax advantages. We are self-employed and can both raise prices and do more advertising to increase our income to cover this. |ret||ret||tab|

We haven't negotiated a price yet and want to offer less than he quoted as a starting point, because we have been here so long and took care of the repairs and maintenance ourselves over the years. We sent him the receipts and always paid on time. We paid for major appliances out of our pocket and took a little off the rent until it was paid. |ret||ret||tab|

There are also things wrong that would need to be fixed before he could get that bigger price. |ret||ret||tab|

He has bought another condo for his son and wants to settle with us now. We don't want to lose our home. Should we offer a lower price or cough up the extra? Leah and Mike via e-mail|ret||ret||tab|

Dear Leah and Mike: I'm wondering how you know that the mortgage will be $600 a month more then the rent since you don't know what the price will be? I suppose you are predicating that on the asking price. |ret||ret||tab|

The fact that you have been there for a long time and took care of the repairs, etc., has nothing to do with anything. He is not in any way obligated to cut you a better break because of that, although he might. The fact that there are deficiencies in the unit is quite another matter. These can be brought to the seller's attention and used as a bargaining chip.|ret||ret||tab|

While I understand that you don't want to lose your home, that should not prevent you from negotiating. |ret||ret||tab|

Further, during the negotiations, you can point out that since you are tenants, there is no necessity to use a broker, which could save him between 6 percent and 7 percent. |ret||ret||tab|

The old story "you don't get unless you ask" applies. On the other hand, if he's asking $1 for the apartment, don't offer him 20 cents. Make your counteroffer reasonable based upon market values in the area, condition, etc. |ret||ret||tab|

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Dear Bruce: I know that you have mentioned many times when buying rental property, the minimum of return per month should at least be 1 percent of the value.|ret||ret||tab|

I'm wondering if that is gross operating income or net? G.G., via e-mail|ret||ret||tab|

Dear G.G.: The 1 percent number is nothing more than an approximate guide and I am talking about gross receipts. A property that is worth $100,000 should bring in a minimum of $1,000 gross per month. |ret||ret||tab|

There are other variables that also must be considered. If the property is a condominium with additional expenses such as condo fees, this would increase the 1 percent estimate. There is nothing magic about the number; it just gives you a ballpark as much as an exclusionary number. For example, if that same $100,000 home could only rent for $500 a month, the deal is not even worth pursuing or analyzing. It should be avoided strictly on the basis of income.|ret||ret||tab|

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Dear Bruce: My parents own a commercial building with a loan balance of $100,000. They tried to sell it, unsuccessfully, for $180,000. It would bring about $260,000 as a residence, but it is not zoned as such. If they get a variance, they then may be able to sell it for the full $260,000. |ret||ret||tab|

Is it possible for me to purchase the building with a residential loan for a little money without raising the Internal Revenue Service's suspicions that the building is undervalued? Could I then deduct the interest payments from my income tax without them having to claim it as income? At this time my parent's personal financial state is not great, and the loan payments are taxing. They don't want to get hit with a big tax bill. Scott, via e-mail|ret||ret||tab|

Dear Scott: Cut through the bologna. If your parents sell the property for in excess of their acquisition cost and depreciation factors, they are going to owe taxes. What you are proposing is fraud. Is that what you really want to do? |ret||ret||tab|

This is not a residential property. It was not your parent's primary residence, therefore they are not entitled to any favorable tax treatment. |ret||ret||tab|

They will have to pay capital gain of 20 percent (or less, depending on their income) on the net profit. All of this fooling around is not going to fool anyone and could get both you and your parents in serious trouble. |ret||ret||tab|

For the relatively modest amount of taxes that will be due, is that type of exposure worth it? I think not.|ret||ret||tab|

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Dear Bruce: I've been a tenant for almost 27 years. The condo I am living in is for sale, and I don't particularly want to buy it, but I can't rent anywhere else for the same money it would take to purchase this one. My question is, if you are supposed to live in a place two to five years to avoid capital gains tax, would my time as a tenant be counted for the two-year requirement? K.D., Philadelphia, Pa.|ret||ret||tab|

Dear K.D.: Sorry, but the 20-plus years is history. The two-year period begins on the first day of your ownership of what will be your permanent residence.|ret||ret||tab|

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Dear Bruce: I would like to get your opinion on whether we should pay extra principal amount on our home mortgage. Both my wife and I are in our mid-50s, have decent savings and pension plans for our retirement, and we own a house with a market value of $130,000 with equity of $40,000. |ret||ret||tab|

We recently refinanced the house with a 15-year mortgage. |ret||ret||tab|

After contributing the maximum allowed amounts for our 401(k) and an individual retirement account, we have about $2,000 a month for savings. |ret||ret||tab|

I am thinking of paying $1,000 each month toward extra principal on the mortgage. Is this the right thing to do? R.J., Saginaw, Mich.|ret||ret||tab|

Dear R.J.: You failed to tell me what the interest rate is on your current mortgage of approximately $90,000. If you have a low rate, which I assume that you do, I wouldn't be anxious to pay this off any earlier than necessary. That doesn't mean I wouldn't save the money. |ret||ret||tab|

Since you are talking about after-tax dollars, it would seem at least $6,000 of the $24,000 that you mentioned ought to be going into a Roth IRA. The money will earn tax-free dollars as long as you elect to leave it there, and you have access to the principal should you need it prior to minimum withdrawal age. |ret||ret||tab|

Taking taxes into account, the likelihood is that you should be able to outperform the interest that you are paying on your mortgage and more important, as interest rates go up, as I believe they will over the next decade, you will have use of very low-cost money. |ret||ret||tab|

Given that circumstance, I would invest the money elsewhere, even if it means putting it into some type of very secure instrument that will let you sleep well and only amount to a break-even venture at this time. |ret||ret||tab|

Four or five years from now the availability of cheap money could work very much to your advantage.|ret||ret||tab|

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Dear Bruce: We built our home 10 years ago, financing $67,000 for 20 years at 8 percent interest. We currently owe $42,000 after 10 years. The house is currently valued at $90,000-plus. We plan on moving in three or four years. Would it be worth it to refinance now, get the payments lower and use the extra money to invest elsewhere? What about capital gains? D.M., Killeen, Texas|ret||ret||tab|

Dear D.M.: If your credit is in good shape, there's no reason to continue to pay an 8 percent mortgage. There is plenty of 6 percent money around. I suggest you take the lowest interest rate you can get for the longest period of time and invest the difference, assuming you have the ability and discipline to do so. |ret||ret||tab|

With regard to your question about capital gains, it doesn't apply in this case. Any profits that you and your spouse make on a primary residence that you've occupied for two of the last five years is exempt up to $500,000.|ret||ret||tab|

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