Question: I'm living with my wife in Los Angeles and we're currently renting. We would like to buy a house but do not know what loan to get -- a 30-year fixed or an interest-only mortgage. My wife and I now earn about $110,000 a year and we expect that our income will continue to increase about $10,000 annually for the next five years. What loan should I get and should I consider a condo?

Answer: The question of which loan is best in your situation relates to your personal finances and preferences. In addition to income, you need to consider debts, credit standing, savings, etc. For specifics you are best served by contacting several lenders to see which programs they feel would be right for your needs.

As to whether or not you should consider a condo, that's a question of personal preferences and local market options. In this instance you should speak with several local brokers , find one you like and engage him or her as a buyer broker.

Question: In 1985 my mother deeded over to me some land with ocean frontage, via a quitclaim deed. The worth in 1985 was around $30,000 to $40,000. The intent was always that I would deed this land back to her at some time in the future. I believe that the reason she deeded this property to me was because my father was having financial difficulties. I do not believe that she filed a gift tax return.

She has now asked that I simply deed this land -- now worth approximately $500,000 -- back to her. Importantly, my net worth presently well exceeds the federal tax-exempt limit, and my lawyer states that this will trigger a likely large gift tax to my estate should something happen to me (combined 50 percent +/- (federal and state) of value). My mother's counsel, on the other hand, says there will be no gift tax to my estate whatsoever, as he reasons that there was an oral trust-trustee relationship in 1985 (note -- there was no trust-trustee relationship written anywhere at any time). My lawyer states that a trust-trustee relationship must be in writing, or else the IRS will consider this a gift and taxable to my estate.

From my readings -- as well as from anonymous discussions with various IRS agents (1-800 hot-lines) -- it appears that my lawyer is correct in that if I just simply deeded this land back to my mother it would be considered a gift, which would likely create a very large gift tax to my estate.

So, the primary question is -- how can I best get ownership into my mother's name without creating a potential large financial hardship to my family? My lawyer suggests we create a trust which my mother could then control, but my mother's legal counsel is against this idea because he says I can simply deed the land over to my mother without any gift tax, so no trust is needed or warranted.

Your thoughts? Thanks so much for your time, as this has become a large family issue.

Answer: You have dueling authority figures with conflicting advice. Rather than try to figure out who's right, perhaps it would be best to take a different approach.

First, it's important to only use a quitclaim deed after getting legal and tax advice. The easy transfer of property 20 years ago has now evolved into a considerable financial burden that could have been avoided.

Second, you need to find out for sure if a gift tax form was filed at the time of the transfer. The IRS likely has electronic copies of such documents. This form, if filed, will help establish an acquisition value for the property.

Third, in addition to gift and estate taxes, what about real estate transfer taxes? Is it possible to transfer the property in exchange for "good consideration;" that is, love and affection.

Fourth, you need to consider your mother's reason for wanting the land returned: Does she want to develop it? Sell it? Give it to someone else? Have you had a dispute which is causing her to again want title? In other words, why do you need to give it back?

Whether the property is or is not a gift, by itself it should not trigger a gift tax because the value is below $1 million. But perhaps your holdings are such that gift and estate taxes are a concern.

Is it possible to defer this matter until 2009 when the estate tax exemption increases? That year, assuming no change in the tax law, the IRS says that "for Gift Tax Purposes in year 2009 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in year 2009 the Unified Credit is $1,455,800 and the Applicable Exclusion Amount is $3,500,000." Would this increase resolve your tax issue?

Rather than give your mother the land, is there a less expensive alternative? For instance, would it make any sense to finance the property and buy her a beach-front condo that she could use on the basis of a life estate? Upon her passing the property would revert fully to you.

For details regarding all options -- and I regret saying this -- speak with appropriate legal and tax authorities.

Question: I own a parcel of land that I paid cash for because it had not been probated and had split ownership within the same family. Long story short, 100 percent interest in that land went through probate and I purchased the land free and clear with cash.

Now I would like to take out a conventional mortgage on the land but no one wants to touch the deal because they either label it a "refinance" (even though there is no mortgage) or a cash-out transaction, which I guess is technically correct. Is there an easy process for distancing myself from the land so that I can turn around and re-purchase it again under more conventional terms (i.e. a vacant land contract between two different individuals)?

In other words, I quitclaim the land to my Uncle Joe, I in turn buy it back from him under contract and under a conventional vacant lot loan (mortgage). I assume Uncle Joe would be exposed to capital gains unless the whole transaction netted zero. My end game is to develop three townhouses on the property, so there will be a limited liability corporation in the future if that helps.

Answer: The property is being refinanced in the sense that you are seeking replacement financing; that is, financing to replace what is or is not there now. And yes, what you are seeking would be a cash-out refinance since you are, after all, taking out cash.

Part of the problem here is that you did not actually inherit the property. Other relatives were in the will so on paper you are simply a buyer. If you recently bought the property then many lenders will shy away from financing until ownership is more seasoned and even then many will want a second appraisal or more verifications in the loan process.

What is the land worth? It may be that the value of the property is insufficient to support the mortgage you seek. What about your income and credit?

As to quitclaim deeds, land contracts and such, lenders will look at the title history of the property and many will decline the loan if they see a succession of quickie transactions. Their worry: Flipping to produce inflated values.

Maybe what you need is financing to develop the townhouses. You have equity in the land and lenders may be willing to put up cash in draws as you work with a builder. Or, established builders with cash or credit may have an interest in buying or optioning the property -- thereby saving a lot of quitclaiming, land contracting and other strategies which are likely to discomfort lenders.

Question: I hear differing accounts regarding capital gains taxation. I own two properties, one is my primary residence, the other is a rental unit that was previously my primary residence. How long do I have to own, and have lived in, each of these properties to qualify for the capital gains exemption?

I hear a couple things.

1. A property must be your primary residence for two years to avoid capital gains.

2. You must own your property for five years, of which it was your primary residence for two of those five years.

I will have lived at my current address for two years this April (this was never an "investment property"). I lived in my "investment" property for a year and a half, before moving. I'm trying to determine if I can move back into my investment (after selling primary) for six months before selling so I can qualify for the exemption.

Answer: Your two points are correct. You can have a rental property that can qualify as a prime residence under certain circumstances, however there are limitations such as only one qualifying sale every two years.

"To exclude gain," says the IRS , "a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use, but longer breaks, such as a one-year sabbatical, do not. The taxpayer also must not have excluded gain on another home sold during the two years before the current sale."

For specifics, please see a tax professional.

Correction

In a column run January 19th the term "eminent domain" used in a reader question should have been changed to "adverse possession" in my editing process. Below is the question and answer, this time with the proper expression.

Question: We purchased several acres about a month ago and some of the acreage is fenced. We are now finding that some property isn't ours, but is fenced into our yard. The original owners did not take care of the property. The property in question also has a small building that appeared to be someone's workshop at one time. We don't have access to it because it is padlocked. Can we claim title to this land through adverse possession?

Answer: Adverse possession typically means that a property has been used openly, notorious and continuously for a given period, say 10 or 20 years. Had the original owners taken care of the property, used the building or done something to suggest continuous use you probably would have a better claim.

For specifics in your jurisdiction, speak with a local real estate attorney.

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