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Advice on protecting rental property

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POSTED July 26, 2013 9:54 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 air-conditioning 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.

A: 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 to cover your rental property.

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.

Q: I wanted to ask your advice on a possible short sale. I own a one-bedroom condo as a second home that I am upside down by probably $50,000.

Although it is rented, the mortgage and carrying costs are just killing me. I have been current on the mortgage payments, but I don’t know how much longer I can keep up, as things have changed, such as a retirement, cost of living, another condo that I own outright, as well as our principal residence.

I was thinking about a short sale for this property, but I’m not sure about the bank’s attitude of the forgiveness of the remaining debt and the tax liability where this is not my primary home.

I could not afford to pay any taxes due to the forgiven debt if that was the case, or even the bill for the amount of debt if it is not forgiven by my lender. Even if I was to sell this other condo, it would probably be worth maybe $70,000.

A: There is an interesting provision in the tax law: If your debt is forgiven, canceled or discharged, unless you meet one of five exclusions, you have to pay income tax on that amount. The exclusions include bankruptcy, insolvency, qualified farm indebtedness, qualified real property business indebtedness and qualified principal residence indebtedness.

Clearly, your underwater condo cannot be your principal residence. It may be that it will meet the requirements of the fourth exclusion. According to the IRS, “you can elect to exclude canceled real property business indebtedness” if it meets all of the following conditions: It was incurred or assumed in connection with real property used in a trade or business; it is secured by that real property (in other words, there is a deed of trust or mortgage); it was incurred or assumed before 1993, or after 1992 if the debt is either qualified acquisition indebtedness or debt incurred to refinance qualified real property business debt incurred or assumed before 1993 (but only to the extent the amount of such debt does not exceed the amount of debt being refinanced).

For more information, see IRS Publication 4681, “Canceled Debts, Foreclosures, Repossessions and Abandonments” at

Q: You had a question about inherited property, taxes and basis. In the last sentence of your answer you said, “if you have owned and used the property for two out of the five years before it is sold” you could avoid tax on $500,000 or $250,000 of gain. However, shouldn’t you have said “used and owned the property as your personal residence for two …” Owning and using as a rental property or a home for a relative, for example, will not work..

A: You are technically correct. Under current tax law, if you have owned and used the property as your personal residence for two our of the five years before it is sold, if you file a joint tax return you can exclude up to $500,000 of your gain from taxation (or up to $250,000 if you file a single tax return).

Q: I am a real estate lawyer in practice for over 36 years, and in the last three months I have encountered a new situation that I find troubling.

Both closings I conducted were lot purchases as part of a construction/perm loan. In both cases, the Realtors were to split a 10 percent commission. The lenders were not the same. The lenders, citing a fed regulation, said the commission could not exceed 8 percent.

How can a lender dictate the commission agreed to by the seller and Realtors, neither of whom have any relationship with the lenders?

A: Based on my research, there is no federal regulation that limits real estate commissions.

However, I suspect this was the lenders’ or perhaps their investors’ requirements.

Banks follow the golden rule: “We have the gold and we rule.”

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