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Landlord insurance: What is needed?

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POSTED June 20, 2013 10:01 p.m.

Q:  What is needed in Landlord Insurance? My husband and I have become

 “accidental” landlords due to me not wanting to sell my family home after my father’s passing.  We do not have any furniture in the house, but do have the standard appliances. Does “appliances” cover the central AC unit, hot water/heater oil-fired boiler, and the oil storage tank outside? Should I have liability insurance? The home will be listed with a property manager.

I would like to hear from a reliable person NOT trying to sell me insurance. Madeline.

A:  Dear Madeline. First, if you already have a homeowner’s insurance on your principal residence, talk to the company (or insurance agent) that covers your house. You may be able to get what is known as an endorsement so as to cover your rental property.

Second, I strongly suggest that you consult a local attorney to guide you through the process of being a landlord. Every state has different rules and procedures that landlords must follow. In some states, you have to register with some government agency that you are a landlord. In some states, your security deposit cannot be more than one month’s rent.

There is a difference between a standard homeowner’s policy and the coverage provided by a landlord’s policy. For example, if your property becomes uninhabitable – because of fire, flood, etc – the landlord’s policy will pay you the fair rental income for up to 12 months.

You also need stronger liability insurance coverage than you can get with the homeowner’s policy. Landlords can be sued –  and are being sued  – for many things, and juries can award large judgments in favor of the tenants. You need a policy that will pay for legal fees, whether or not you are successful. Quite often, the legal fees can be as high – if not higher – than any judgment.

Yes, the landlord’s policy should cover all of the appliances. It should also include coverage for such things as freezing pipes, glass breakage, wind and hail, falling objects (such as trees), temporary repairs after a loss, and debris removal.

I appreciate that you want to talk with a person whose only objective is to sell you insurance. So I suggest you contact a couple of insurance agents, and get comparable quotes as well as a complete outline of what will be – and will not be –covered.

RESPONSE FROM A READER:  You recently answered a question about whether property taxes would go up if someone was removed from a deed. In Michigan,   property taxes are capped and cannot be substantially raised unless there is a transfer of ownership. Then the property is reevaluated and taxes set on the new assessed value. This is usually an estimate based on nearby home sales. The definition of ‘transfer of ownership’ is up to the township. In my mother’s case, she transferred the deed from ‘Property Owner’ (herself) to ‘Property Owner Revocable Trust’ (also herself). There were no additions, subtractions nor any changes made except the name under which the deed was held. This was determined to be a change of ownership allowing her taxes to be uncapped and increased based on values at that time. I don’t know, but I suspect, that if she had done it two years later when values had plummeted that it would not have been judged a transfer. They would have been happy to keep the old, higher value. I’m just suspicious that way.

 And thank you for making real estate easier to understand. You, and Mr. Bruss before you, have answered many questions we would not have known to ask. Stefani.

A: Thanks, Stefani, for your helpful comments. Obviously, since I write for a national audience, I don’t know the laws in each state, so readers should inquire of their local real estate taxing authorities what their policy is when property is transferred. This is especially a concern since many families are doing what your mother did – namely transferring property to a revocable trust for tax purposes.

Q:  My husband and I are not on title, but are living in the home that his parents own. We  made a significant down payment when the house was purchased and we are basically paying all of the expenses – from the mortgage, real estate taxes and all improvements and repairs. Can we deduct the interest payments and real estate taxes on our tax return?  Carrie.

A: Dear Carrie: Ironically, your  situation is similar to a decision issued by the Unites States Tax Court last year.  Here are the facts: Conrad Edosada’s parent bought a house in California and title as well as the mortgage documents were only in the name of the parents. However, Conrad made a substantial contribution to the down payment and agreed to be completely responsible for the mortgage payments. The court heard testimony that the parents ultimately planned to convey title to Conrad.

The general rule is that you cannot deduct interest payments unless you are on title and have personally signed the loan documents (deed of trust and promissory note) and that the mortgage has actually been recorded among the land records where the property is located. For this column, I am using the terms “mortgage and deed of trust interchangeably.

However, the Tax Court opinion referenced  section 1.163-1(b) of the Income Tax regulations, pointing out that “even if a taxpayer is not directly on a mortgage, the taxpayer may nevertheless deduct the mortgage interest paid if he or she is the legal or equitable owner of the property subject to the mortgage”.

Clearly, Conrad was not the “legal” owner, so what does it mean to be an “equitable owner”? According to the Tax Court, “in determining whether the benefits and burdens of ownership have been transferred to a taxpayer”, we consider the following: “whether the taxpayer (1) has a right to possess the property and to enjoy the use, rents or profits thereof; (2) has a duty to maintain the property; (3) is responsible for insuring the property; (4) bears the property’s risk of loss; (5) is obligated to pay the property’s taxes, assessments or charges; (6) has the right to improve the property without the owner’s consent, and (7) has the right to obtain legal title at any time by paying the balance of the purchase price.” (Edosada v Commissioner, T.C. Summary Opinion 2012-17).

So, Carrie: if you can meet most if not all of these seven points, you can take the tax and interest deductions. But don’t do what Conrad did: he claimed a larger deduction than he actually paid and the Tax Court not only disallowed that extra amount but also hit him with what is known as a section 6662(a) accuracy-related penalty.

TIME SHARE RESPONSE FROM A READERS: 

I was in same position as with many people in that I wanted to sell my timeshare. I found  out the best way to do it.

 First realize that your timeshare is probably worth only $1.00. List it on EBay with minimum bid of $1.00

Call your timeshare office and see it they will give you the name of their attorney that handles their transactions for when people die or just give it up or contact a local real estate attorney there the property is located. Contact them to handle your sale for what is a very simple real estate transaction.

Your time share hopefully will sell on Ebay.  And you are done

Never, never sign title over to Power of Attorney and make sure your attorney changes official ownership with timeshare management company A MUST, or you will keep getting bills for yearly maintenance.

 I sold mine for $145.00 and paid the attorney $750 Walt.

A:  Walt. Interesting and novel approach.  I suppose if time share owners who initially paid thousands of dollars are prepared to unload the property for just one dollar, your plan may work. And from the numerous letters I get from frustrated owners who want out from under the financial burdens, I suspect that more people will try the Ebay approach.

However, you have to make sure that your time-share can, in fact, be sold and that a buyer can pick up (i.e. assume) your financial obligation. Most deeds of trusts (mortgages) have what is known as a “due on sale” clause, which permits a lender to accelerate the balance of the loan when the property is sold or transferred.

Furthermore, if you do go the Ebay route, you have to make sure that you are selling “as-is”, with no warranties or representations. Clearly, you don’t want your buyer to turn around and sue you for non-disclosure or misrepresentations.

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