For sale: New home; water pressure not included

Q: We purchased a newly constructed home and the builder failed to advise us of a water pressure problem. After six months of fighting with the local water company, the water company installed a booster pump in our home at no charge to us. We have had no ability to water our lawn, and the builder refuses to reseed. We have had no use of any outside water whatsoever. Do we have any recourse?

A: If you had had a professional home inspection done prior to purchasing your new home, that may have picked up the problem.

It's fair to say that every home should have a minimum amount of water pressure and if your home did not meet that level, the home builder should bear responsibility for the problem. If, however, the problem with the water pressure is caused by a problem with the local municipality, the builder should have dealt with that problem prior to the sale.

Now, if your builder is refusing to help out, you may have to explore your legal options. Please talk to a real estate attorney about your situation and what remedies your contract provides.

Q: I acquired my parents' property for $10 in 1987. A quitclaim deed was drawn and filed in my name.

I have, since then, mortgaged this property in order to buy my primary residence in 1998 and have also refinanced it so I could do home improvements on my primary home. I presently have a mortgage of $179,000 on the property.

I wish to sell this second property because double tax and insurance annual bills are both impractical and unnecessary, and I'd rather use the sale money to pay off my primary residence.

My question to you is the following:

Am I required to pay the 15 percent sales tax mandated by the IRS predicated on the entire sale price of the property, or do I pay the 15 percent sales tax of the sale price after satisfying the existing mortgage balance of $179,000?

Any answers you can provide will prove of the greatest assistance.

A: I'm sorry to tell you that your mortgage has nothing to do with how the IRS views the profit on your property.

You bought the property for $10. That is known as your cost basis. If you made any capital or structural improvements to the property, you can add that cost to the cost basis, to come up with your adjusted cost basis.

Take the sales price and subtract all costs of sales plus the adjusted cost basis of the property. That will give you your profit.

Let's say you're selling the property for $300,000. You paid $10 to it and let's say you have $40,000 in improvements to it plus $10,000 in selling costs. That means your "profit" is $250,000. If you lived in the property as your primary residence, you'd be able to keep up to $250,000 in profits tax-free (or $500,000, if you are married), as long as you had lived there for two out of the past five years as your primary residence. Since this is an investment property, when you sell, you'll owe long-term capital gains tax on the $250,000 plus state tax and even other federal taxes depending on whether you took advantage of any tax benefits for depreciation over the years.

Please talk to your accountant or tax preparer for more details.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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