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Co-ownership woe: forced sale

Question: Almost six years ago a college classmate and I invested $15,000 each in a small apartment building. I've managed the building and it produces a nice cash flow. However, it adjoins a commercial area and a nearby restaurant wants to buy our building to expand their parking lot. Their purchase offer will give us a net profit of more than $75,000 each, but my stubborn co-owner won't sell because he doesn't want to pay the tax on his profit.

Is there anything I can do to force him to sell because I don't want to lose this great offer?

Answer: You can bring a partition lawsuit against your co-owner. The judge can then order the property sold with the proceeds divided between the co-owners.

Your situation shows the possible pitfalls of investing in real estate with a co-owner. Although you both had the same idea of earning profits when you bought the apartments, when you have an opportunity to sell at a substantial profit there seems to be disagreement.

It's a bargain

Question: Our credit is not the best. Before making an offer to buy a home, we needed a mortgage commitment. With our bad credit, we went to a mortgage broker. She found us a lender who will make us a home loan at 9.5 percent fixed interest rate. I realize this is high. However, in our situation should we take it?

Answer: A 9.5 percent mortgage interest rate is higher than you could obtain if you had excellent credit. However, consider your after-tax interest rate.

If you are in the 28 percent tax bracket, after considering your income tax savings, that mortgage will cost you only 6.84 percent interest. That is a bargain. Grab it.

Take the risk

Question: Each year my wife and I set aside about $25,000 for investment. In the past, we bought mutual funds and common stocks. We're doing okay but nothing spectacular.

This year I think we should follow your advice and buy a run-down fixer-upper house. There is one for sale a few doors away from our home, but the problem is we will have to borrow almost $100,000 to finance the purchase of this house.

My brother (a plumber) and I can easily fix-up this house to make it worth $175,000. Would I be making a big mistake to borrow $100,000 to make a possible $75,000 profit?

Answer: Don't be afraid to borrow money to earn money. The situation sounds like a fantastic fixer-upper house. Unless your fix-up costs will be too high, go for it.

Pay now or pay later

Question: I own a vacation home which I can sell for a net profit of about $75,000. How can I get out of paying tax on my profit?

Answer: Sorry, vacation homes are not eligible for the "over 55 rule" $125,000 home sale tax exemption or the "rollover residence replacement rule." The reason is your vacation home is not your principal residence.

You can defer tax on the sale of the home by making an Internal Revenue Code 1031 tax-deferred exchange. To qualify, you will need to rent the residence to tenants. Tax advisers suggest renting it six to 12 months before selling, then you can make a tax-deferred exchange for another investment or business property. Please consult a tax adviser for full details.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 64 E Concord St., Orlando, FL 32801.