DEAR BOB: I have a tenant who wants to buy the rental house where he lives. He is a self-employed licensed general contractor. He wants me to carry back the first or second mortgage. That's possible because I own the rental house free and clear. But I have held mortgages before and regretfully had to proceed with foreclosure. Then I discovered the property taxes were unpaid and I had to pay them to prevent a tax sale. Since my tenant is self-employed, if he neglects to pay the property taxes or his income tax, payroll tax and withholding tax, will any of these take priority over my mortgage? – Bunny H.

DEAR BUNNY: Your first step should be to get the prospective buyer to provide you with a copy of his credit report and FICO (Fair, Isaac and Co.) score. He can obtain this at www.myfico.com for $12.95. If his FICO score is less than 620, you have a high-risk borrower.

Presuming he gets past the credit test, your second step should be to write up a sales contract with the sales price, buyer's down payment, and other sale terms you and the buyer agree upon. I'll presume he has an excellent on-time rent payment record or you wouldn't be considering him as a buyer.

Property taxes always have first priority. That's why many mortgage lenders require the property taxes and fire insurance premiums to be escrowed. That means each month the borrower pays one-twelfth of these annual expenses along with the monthly mortgage payment. You could escrow the property taxes and fire insurance too, just like the “big boy” lenders.

If your buyer fails to pay his IRS income taxes, payroll tax and withholding taxes, the federal and state tax authorities could record liens against the house. But those liens would be junior to your prior-recorded first or second mortgage.

Landlords who sell their rental houses to good tenants are usually creating great investments for themselves. Having done that many times, I've learned it is much more fun and far easier collecting mortgage payments than collecting rent without having to worry about “tenants and toilets.”

THE BEST BOOK ON HOW TO PROTECT YOUR ASSETS

DEAR BOB: I learn so much from reading your articles. Several months back you mentioned a book you said was the best one about how to protect your assets. Please furnish the book title and author name – Guy T.

DEAR GUY: Thanks for your kind comments. The excellent book you refer to is “Wealth Protection Secrets of a Millionaire Real Estate Investor” by attorney William Bronchick. It is available in stock or by special order at local bookstores, public libraries and www.amazon.com.

SHORT 45-DAY TAX-DEFERRED EXCHANGE DESIGNATION LIMIT

DEAR BOB: I have used your excellent advice several times, especially when you write about Internal Revenue Code 1031 tax-deferred exchanges. Right now I am in the middle of such an exchange. However, I had a heart attack and found the 45-day period to designate the replacement period is far too short. Why did Congress set such a brief time limit to designate a replacement property so I can defer my profit tax? – Dick L.

DEAR DICK: I wish I knew the answer to that good question. Perhaps your Senators and Congressperson can help.

The 180-day period to complete an IRC 1031 Starker delayed tax-deferred exchange is very reasonable. But we agree the too-short 45-day period to designate the qualifying replacement period is inadequate. A 180-day period to name the replacement property and complete the exchange would be much fairer. For more details, please consult your tax adviser.

The new Robert Bruss special report, “2004 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Investors,” is now available for $4 sent to Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.