Dear Ask George: "My husband and I bought a house in 1999 for $350,000. We can now sell it for $900,000. My gross profit will be $550,000. I know that $500,000 is tax free. I am paying a real estate broker a commission of $60,000. For capital gains purposes, is the broker's commission considered as a deduction from the capital gains tax since it is a selling expense?" - Baffled

Dear Baffled: The $60,000 in Real Estate Broker Commission is an expense incurred when you sell your home. That expense should be deducted from the "Selling Price" along with other selling expenses. The result is the "Amount Realized." The Amount Realized is then reduced by the Adjusted Basis to arrive at the amount of Capital Gain or Loss.

Access the IRS website and download Publication 523 and read that entire publication. If you have questions after reading it, call the toll free number listed on Page 2 of Publication 523, 1-800-829-1040.

Dear Ask George: "I would like to purchase a house with an associate. Both of us would be putting up large down payments, but I don't completely trust him to make the mortgage payments.

In order to avoid any future problems, are there any contracts that would protect my share of the house in situations where he is unable to pay so that I would continue to pay and he would lose his share? The terms "Subordination Agreement," "Tenancy in Common," "Joint Tenancy," and "community property" come up, but I am not sure how they relate to my issue." - Careful

Dear Careful: In my opinion, the relationship involving co-ownership of a property is "iffy" at best when two individuals base that relationship on mutual admiration and respect, but it is downright foolish when you begin the relationship with concerns about your partner's ability to carry out his financial commitments.

If you are bent on having a contract fashioned so that you have the ability, given certain qualifying events (such as a set period of time when your partner delays a mortgage payment or when the draw upon a special mortgage payment deposit account reaches a certain level), I suggest you consult an attorney experienced with real estate contracts. A word of caution, though, any contract is a two-sided sword: it cuts in both directions so that you most likely will also be subject to your own fail-safe clauses. When two or more people co-own a parcel of mortgaged real estate, each individual is usually jointly and severally liable for making mortgage payments. In that regard your concerns are well founded, but getting a co-ownership contract that enables you to assume ownership of your partner's ownership share is, at best, a tricky thing that -- in my opinion as a real estate broker, requires a different lawyer representing each party to the contract.

Dear Ask George: "We've been approved by a lender to purchase a home. However, we are having difficulty in making a decision involving our 2004 car. When we bought the car our credit was not good. The finance company charged us a high interest rate so our car payments are way up there. Now that we are cleaning our credit up, our finance company is offering a lower interest rate. If we refinance it at a lower interest rate before we get a home, will that hurt our credit? We are just trying to lower our bills." - Curious Borrower

Dear Curious Borrower: I suggest you check first with the loan officer from whom you got approved. He or she will most likely suggest that you not do anything until you actually fund the loan when you complete the real estate transaction, but let's leave that up to him or her.

Speaking of getting approved, what was your approval process? To ask in another way, have you filled out a Fannie Mae 1003 Form, Uniform Residential Loan? You are not really approved until you submit the loan application, and even then, certain contingencies exist such as keeping your job(s), not running up your credit card debt or having a bunch of credit inquiries from retailers, etc. etc. I'm a little bit surprised that your loan officer didn't cover those points with you.

Dear Ask George: "I am selling a second home, a two-family in Salem and want to reinvest the money to prevent capital gains. What are the rules regarding the properties I can reinvest in? Can it be a condo, single family, or do I need to reinvest in another like two-family home?" - Seller

Dear Seller: I recommend you read IRS Publication 523, "Selling Your Home." In it, page 3 deals with utilizing the exclusion of capital gains, but the exclusion is limited to only your main home. Other homes that you own as second homes or investment properties are taxable either as ordinary income or as long term capital gains depending upon the length of time you've owned the home.

However, if it is investment property it can qualify for 1031 treatment which effectively defers the taxes. You can then invest in any "like-kind" investment property without a tax consequence. Real properties -- real estate, generally are of like-kind regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

I suggest you read IRS Publication 544, "Sales and other Dispositions of Assets," and look at the section dealing with "Like-Kind Exchanges" under Nontaxable Exchanges.

Published: April 27, 2005

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George Stephens, CRB is the Broker of ERA Stephens Properties. He is licensed as a mortgage broker in Texas, and a real estate broker in Texas, Georgia, and Massachusetts. Charles J. Jacobus, JD is Board Certified by the Texas Board of Legal Specialization in Residential and Commercial Real Estate Law, and the author of Texas Real Estate Law, and Texas Real Estate, both published by Thomson Publishing. He also teaches at Champions School of Real Estate, Houston Community College, and is an adjunct professor at the University of Houston Law Center. To send us a question visit AskGeorge.net and click the "Ask A Question" button. The answers to questions in this column do not contain legal advice. George and Chuck are co-authors of Texas Real Estate Brokerage and Law of Agency, published by Thomson Publishing. If you wish to obtain legal advice, you should consult your own attorney.