Posted on Fri, Feb. 17, 2006    The Charlotte Observer - displayed by permission

ROBERT BRUSS

A widower's tax exemption

Q. In 2005, my mother died. Her will left all her assets to my dad. Their major asset was their home, now worth around $450,000. However, title to the house was held in my dad's name alone. He owned the house before their marriage 47 years ago. I think he paid around $20,000 for it, but he never added mom's name to the title. Does my dad get a new stepped-up basis to market value as of the date of my mother's death?

No. The very logical reason is that your father didn't inherit your late mother's interest in the house because she didn't hold a partial title to it. Therefore, the stepped-up basis rules for inherited property don't apply because nothing was inherited.

However, if your dad had sold the house in 2005, presuming he and your late mother lived there at least 24 of the 60 months before its sale as their principal residence, he could have claimed up to $500,000 tax-free profits under Internal Revenue Code 121.

Because he didn't sell the house in 2005, if he decides to sell the home in 2006, he will be entitled only to a $250,000 individual tax exemption. For full details, your dad should consult his tax adviser.

Homeowner dues

Q. I am president of our homeowner's association. Our CC&Rs (covenants, conditions and restrictions) state the monthly dues can be raised 20 percent per year and be cumulative. We recently had to raise them from $275 to $425 because we made our swim club part of the common area. But we have a small (less than 10 percent) vocal group who disapproved. They want to decrease the maximum annual percentage of dues increase to 10 percent and make it non-cumulative. We require a 75 percent vote to change the covenants. Do you think this is a good idea?

If I were in your situation, as president of the homeowner's association, I would remain neutral on this issue. Let the vocal minority give it a try to change the CC&Rs. They will find out how difficult it is to get 75 percent approval. Personally, I think the 20 percent maximum dues increase is a bit high, but that's just my opinion.

Final mortgage payment

Q. I know you answered similar questions before, but I can't recall the answer. My home mortgage will be paid off in eight months. After my final payment, what should I expect to receive from the bank? Is there anything my wife and I should do with our wills or anything else?

Congratulations on making your final mortgage payment in a few months. However, please don't burn your mortgage papers. Hold a symbolic mortgage burning party, if you wish, but burn only photocopies and keep the originals just in case.

After you make your final mortgage payment, your lender should send you proof the title was cleared of the mortgage or deed of trust. Exact procedures vary by state.

Some lenders send a mortgage satisfaction or deed of reconveyance for you to record at the local recorder of deeds. Other lenders handle the recording but ask you to pay the recording fees.

Be sure to follow up if you don't receive documentation within 60 days. This is important. If the mortgage or deed of trust isn't cleared from your title now, when you later sell or refinance, it could be very difficult to get your lender to promptly clear your title then.

Deduction due?

Q. I own a loft in a live/work building of 12 units. The building is six years old. Due to water leakage from the outside, the homeowner's association authorized a special assessment to find the cause, fix it and seek legal remedies against the builder. Can part of this assessment be deducted on my income tax returns?

From your description, it appears part of that special assessment qualifies as an "ordinary and necessary business expense" for the portion of your unit which applies to the business area of your work-live loft.
To illustrate: If you use 50 percent of your space for your business, and 50 percent for your personal living area, then you can justify deducting as a business expense 50 percent of the special assessment.

Tax deduction

Q. I own a house with a friend. Both names are on the deed, but he no longer lives in the house (because my wife moved in). The entire mortgage payment is automatically deducted from my bank account. Can I claim the entire mortgage payment when I itemize my tax deductions?

Yes, you can deduct your mortgage interest and property taxes that you paid in 2005. Of course, the principal portion of each mortgage payment is not deductible.

Although your friend still owns a share of the house, he isn't entitled to any mortgage interest or property tax deduction that he didn't pay.