Some Improvements Qualify For Tax Break

No. Get a copy of IRS Form 2119, Sale of a Residence. It will guide you in calculating your home-sale profit. As you will discover, your improvement costs should be added to your home's purchase cost. The result still will be a reduction in your home-sale profit.

All the items you listed qualify as capital improvements, except for the paint job. Painting is considered a repair and has no tax consequences unless incurred within 90 days before the sale and paid for within 30 days after the closing. Then it qualifies as a home-sale fix-up expense, which can be subtracted from your home's gross sales price along with other sales expenses, such as the real estate sales commission and transfer costs.

Almost two years ago, we bought a vacation cabin. The seller said he had inherited the place. Since the cost was only $32,000, we paid cash and didn't get a mortgage or title insurance. Last month we received a certified letter

from a lawyer who represents a man who claims to own the property. It seems the owner lived overseas for several years and has returned to live in the cabin. He had left his nephew in charge. We think that the man who sold us the cabin was the nephew and that he forged the deed. What can we do to save our $32,000 investment?

You should never have paid $32,000 cash for real estate without some assurance that the seller was really the owner and that you were receiving marketable title. There is no excuse for your not having obtained an owner's title-insurance policy.

If the deed you received was forged, it is void. In other words, you received nothing. Your only recourse is to sue the dishonest nephew - if you can find him, and if he has any money left.

We recently sold our home and are building our "dream house" retirement home. It should be finished in a few months and will cost slightly more than the net sales price of our old home. Since we are well over 55 and eligible for that $125,000 home-sale tax exemption, in our situation do we have to use it?

No. The "over-55 rule" of Internal Revenue Code 121 is elective. Since you are buying a replacement principal residence costing at least as much as the net (adjusted) sales price of your old home, your profit tax will be deferred anyway using Internal Revenue Code Section 1034, which is available to home sellers of any age. In your situation, it would be wise to save your $125,000 home-sale tax break for future use.

Almost every week I see an ad for FHA- and VA-foreclosed houses. A real estate broker told me that there were a few bargains among such houses, but that they usually were just junk. A big problem, she said, is that because the utilities usually are turned off, the water pressure, furnace and other components can't be thoroughly inspected. What do you think?

Your real estate agent gave you a good evaluation of FHA- and VA-foreclosed houses. She also could have told you that the asking prices usually are pretty close to full retail value and that they are not terrific bargains.

Another problem is that you would have to put up with all the government red tape of filling out endless forms to submit your bid. Because such homes are sold as is, the lack of complete inspections is a major drawback that is hard to overcome.

I want to invest in real estate, but my wife thinks we should buy a single- family house because we are expecting our first child in September. As a compromise, we are looking at duplexes where we would live in one unit and rent the other to tenants. Do you think this is a good idea?

I started my real estate-investment career in a similar situation by purchasing a triplex where I lived in one unit and rented the others to tenants. Although small income properties usually do not appreciate as fast in market value as do single-family houses, they can be a great first investment.

But I found that the big disadvantage was living too close to my tenants, who always seemed to want some improvement or minor unnecessary repair. When I moved away from the property and my tenant contact dropped to zero, I found that the requests also dropped to zero. Small properties can be good starting

investments.

My husband recently retired and we have been talking about buying a mobile home, so we can drive around the United States. He says we can deduct our costs of the trip. Is this true?

Not exactly. If your mobile home qualifies as your primary or secondary residence, presuming it has cooking and toilet facilities, then you can deduct the interest and property taxes for it. You cannot deduct expenses such as fuel and insurance.

Readers can address real estate questions to Robert J. Bruss, c/o Tribune Media Services, 64 E. Concord St., P.O. Box 119, Orlando, Fla., 32802.