“The difference between death and taxes is death doesn’t get worse every time Congress meets.” –Will Rogers

In my series of tax articles, I have discussed the tax benefits for residential properties, such as the exclusion of gain of up to $500,000, or the various tax deductions available to homeowners.

Now I turn to the tax benefits available to real estate investors.

If you own investment property, and sell it, you will have to pay capital gains tax; for 2008, the tax rate is 15 percent.

But investors are required to depreciate a portion of their property. While this may provide a small tax benefit each and every year, when the property is ultimately sold, in many cases this depreciation must be recaptured at the rate of 25 percent.

Enter the like-kind exchange, which is a way of deferring that tax. At the outset of this column, it must be pointed out that contrary to popular opinion, this is not a “tax-free” transaction. The exchange, authorized by section 1031 of the Internal Revenue Code, will only defer — not avoid — the capital gains tax. It will not relieve you from the ultimate obligation to pay the capital gains tax.

Many years ago, a man by the name of T.J. Starker sold property in Oregon, pursuant to a “land exchange agreement,” but did not receive any money for the sale. Instead, the seller — a couple of years later — transferred replacement property to Starker. The Internal Revenue Service considered this a taxable sale, but the 9th Circuit Court of Appeals held that this was a deferred exchange permitted under Section 1031 of the Tax Code. In other words, the exchange did not have to take place simultaneously.

The ideal exchange is a direct exchange. I own investment property A and you own property B (also investment). Both are of equal value. On Jan. 1, 2008, you convey B to me and on that same day I convey property A to you. If there is a written agreement between us that this is to be a 1031 exchange, neither of us will have to immediately pay any capital gains tax on any profit we have made.

But it is almost impossible to arrange such a transaction. The logistics of finding the replacement property to be exchanged simultaneously with the relinquished property is very difficult to coordinate.

Accordingly, most 1031 exchanges today are deferred.

There are two kinds of deferred (Starker) exchanges:

* Forward exchange: You sell the relinquished property, and within the time limitations spelled out in Section 1031, obtain the replacement property;

* Reverse exchange: You obtain title to the replacement first, and then sell the relinquished property.

The rules are complex, but here is a general overview of the process. With some important exceptions (discussed below) the rules apply equally whether the exchange is forward or reverse.

Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:

Must be investment property: The property transferred (called the “relinquished property”) and the exchange property (”replacement property”) must be “property held for productive use in trade, in business or for investment.” Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house. Your vacation home would also not qualify as investment property, unless you actually start to rent it out more or less full time.

The area of vacation homes is complex and often misunderstood by taxpayers and lawyers alike. The IRS recently promised to provide more information to taxpayers regarding the treatment of these vacation homes.

There must be an exchange: The IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase. Practically, an exchange looks like a sale, but the paperwork involved with the transaction makes it an exchange. It is important that anyone considering a 1031 exchange retain counsel who is familiar with the various rules.

The replacement property must be of “like kind”: As a general rule, all real estate is considered “like kind” with all other real estate. Thus, a condominium unit can be swapped for an office building, a single-family home for raw land, or a farm for commercial or industrial property.

Once you meet these tests, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using a like-kind exchange will make up for the lower cost basis on your new property. Many taxpayers are excited about the concept of deferring their gain, but when they analyze their situation, they realize that the tax will only be a few thousand dollars. Additionally, becoming a landlord again may not be that attractive.

There are two important time limitations that are spelled out in the statute and cannot be waived or modified:

1. Identification of the replacement property within 45 days. Congress did not like the fact that Mr. Starker had no time limitations on when the exchange could take place. Accordingly, the law now requires that the taxpayer identify the replacement property no later than 45 days after the relinquished property has been sold. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any number of properties as long as their aggregate fair market value does not exceed 200 percent of the aggregate fair market value of all of the relinquished properties.

The replacement property or properties must be unambiguously described in a written document. According to the IRS, real property must be described by a legal description, street address or distinguishable name (e.g., The Nathan Apartment Building).

2. A neutral party is essential. If the taxpayer has any control of even one penny of the relinquished property’s sales proceeds — even for one minute — the exchange will fail. All such proceeds must be held in escrow by a neutral party until the taxpayer is ready to close on the replacement property. At that time, the funds must go directly into that purchase. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure that the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be a broker or an attorney, unless the attorney had within the past two years represented the taxpayer. In such cases, the IRS takes the position that the client controls the attorney and the funds would be constructively in the hands of the taxpayer.

3. Take title within 180 days: Title to the replacement property must be obtained no later than the earlier of 180 days after the relinquished property is transferred or the due date of the taxpayer’s income tax return for the year in which the transfer is made. If, for example, you transferred the relinquished property on Dec. 1, 2008, your tax return is due on April 15, 2009, which is only 136 days. You either have to obtain the replacement property by that date or get extensions from the IRS so that you can extend out to the full 180 days. Nowadays, getting an extension is automatic. If by the due date, you file Form 4868, you will get an extension for six months. Please note, however, that while this allows you to late file your tax return, you still have to pay the tax by April 15, 2009.

4. Interest on the exchange proceeds.

What happens to the interest earned while the sales proceeds are held in escrow? The IRS calls this the “growth factor,” and any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property or paid directly to the exchanger.

Reverse exchanges: It is often difficult to meet the 45/180-day requirements. You have found the replacement property, but do not yet have a buyer for your relinquished property. And the owner of the new property is not prepared to wait until you are able to go to closing on your current property.

The reverse Starker — if done properly — can solve this dilemma. Here are some of the important rules:

1. The taxpayer must arrange for the replacement property to be held in a “qualified exchange accommodation arrangement.” In government language, this is called “QEAA.”

2. Qualified indicia of ownership of the property by the QEAA is required. This means that the QEAA must either have legal title to the replacement property or some other arrangement that is acceptable to the IRS to demonstrate ownership. For example, a land sales contract (also called “contract for deed”) may suffice. Under this latter arrangement, the QEAA will not have actual legal title, but will have contractual obligations. This may — depending on state or local law — avoid having to pay a double recordation-transfer tax. Otherwise, this tax must be paid when the property is first transferred to the QEAA and then again when it is transferred to the ultimate taxpayer.

3. No later than five business days after the property is transferred to the QEAA, the taxpayer and the exchange accommodation titleholder (called the QEAT) must enter into a written agreement that states that the latter is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031. Generally, this can be accomplished by a lease of the property from the QEAT to the taxpayer.

4. Both the taxpayer and the exchange accommodation titleholder (the QEAA) must file separate federal income tax returns, so as to advise the IRS of any income and expense incurred while the QEAT had ownership of the property.

5. No later than 45 days after the replacement property is transferred, the taxpayer must identify the relinquished property. The IRS allows the taxpayer to identify alternative and multiple properties, and if the taxpayer owns several investment properties, this provides some flexibility as to which property will be sold.

6. No later than 180 days after the replacement property is transferred to the QEAT, it must be conveyed to the taxpayer.

7. Perhaps the most important aspect of a reverse Starker is the requirement that the taxpayer have a legitimate desire to engage in a 1031 exchange. According to the IRS regulations:

At the time the qualified indicia of ownership of the property is transferred to the exchange accommodation titleholder, it is the taxpayer’s bona fide intent that the property held by the exchange accommodation titleholder represents … replacement property … in an exchange that is intended to qualify for non-recognition of gain (in whole or in part) or loss under a 1031.

In other words, you cannot buy the replacement property and then — as an afterthought — decide to treat the transaction as a 1031 exchange.

The rules are extremely complex. You must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction — whether forward or reverse.

Q: Ginny, my ex-husband and I bought a house in 1995. We divorced in 1999, and pursuant to our divorce decree, he kept the house and I moved out. We both remarried in 2000. My new husband and I have a new mortgage on our home, after fighting to prove to the lender that my ex has the previous house.

I know my ex has changed something on his mortgage. He was making higher payments for a year after he fell behind a couple of months. I really don’t know the details because I no longer own the house.

Is there anything I can do to get my name removed from the mortgage so that my ex’s late mortgage payments do not affect my credit? I have excellent credit and have written to the credit bureaus, but his late payments keep showing up on my reports.

A: Sandra, this is a common problem, largely caused by divorce lawyers who do not understand real estate and mortgage law.

As is often the case, you transferred ownership of the house to your former husband, but you remain legally obligated to make the mortgage payments.

That’s because when you and your ex-husband bought the house, you both signed two legal documents: a promissory note and a deed of trust.

The note is an IOU. The two of you — jointly and severally — agreed to make the monthly mortgage payments. “Jointly and severally” means that each of you is fully responsible for meeting the terms and conditions of the note. And one of the conditions is that you must make the payments on time every month or both of you will be in default.

You also signed a deed of trust, which is the mortgage document. It is recorded among the land records where your property is located. It is the security that the lender needs to extend you the mortgage loan.

You both deeded the property to a trustee selected by your lender, who holds the property in trust. That means that if you ultimately pay off the mortgage, the trustee will release the deed of trust. If you and your ex-husband go into default, the lender has the right to tell the trustee to foreclose on your property.

Although you are no longer married to your ex-husband, your name is still on the note and the original deed of trust remains in place.

The bottom line is that your divorce lawyer should have required that your ex-husband refinance the existing mortgage within a set time.

Appropriate enforcement mechanisms should have been included in your separation agreement, such as requiring that the house be sold if it couldn’t be refinanced. If your ex-husband refinances the house, that would completely relieve you from any further obligations under that old promissory note.

So how did you manage to get a loan for the house where you live now, even though you’re still legally tied to that other mortgage? Lenders will show a degree of flexibility, because your situation is not unique.

Edward J. Achtner, a senior mortgage loan officer at Bank of America, in Bethesda, Md., said his bank has procedures for dealing with post-divorce cases such as yours. The bank won’t count that previous debt against the applicant if “there is a judicial decree stating that the old mortgage is no longer the responsibility of the applicant, and we see that the old mortgage has been paid by the ex for a period of 12 months.”

Achtner said, “We must have the actual divorce decree and either get 12 months cancelled checks or a letter from the mortgage company that services the old mortgage.”

However, it is often difficult to get that information from mortgage companies, because they often do not know who sends in the check. And with electronic and automatic payments, this becomes almost impossible.

Given that your divorce did not require that your ex-husband refinance the house, what should you do now?

First, because you are still on the mortgage, you have the right to know whether it is being paid on time. If you learn that your ex-husband is paying late or not at all, you should immediately write to all three major credit reporting bureaus. Explain that you are no longer the property owner, that your ex-husband is required to make the payments and that his lateness should not hurt your credit.

Second, if you want to refinance your current home or buy a different one, you should seek a lender that understands these situations and is willing to work with you.

However, as Achtner pointed out, if you can’t get the divorce decree and the documentation showing that the loan has become your ex’s responsibility, things become more complicated. “Then we do need to consider the old mortgage into the debt-to-income ratios, and that can make a substantial difference in terms of qualification,” he said. Lenders will review each loan application on a case-by-case basis.

These are unnecessary complications that should be headed off in advance. Couples who are divorcing should address this issue during the process, instead of waiting until it is too late.

Sometimes you just want to get away from it all. And that doesn’t mean simply turning the phone off. For some second-home owners it means escaping everyday stress by going off-grid — living life more or less unplugged.

“The term ‘off-grid’ means away from the utilities — not being connected to an electricity company and such,” said Alan Bridgewater, author of “The Self-Sufficiency Specialist: The Essential Guide to Designing and Planning for Off-Grid Self-Reliance” (New Holland). “But it has also to do with a state of mind. While the term was originally used to describe a house in the developed world that by necessity or choice sourced its own energy, the term is also now more and more being used more to describe an independent way of life.”

Nick Rosen, editor of Off-grid.net, bought his retirement home this way. “I wish I could claim great ideological purity or trend-spotting brilliance, but I stumbled across the off-grid life because it was all I could afford,” he said in an e-mail message. “I bought a mountaintop shepherd’s hut in Majorca, home to Michael Douglas and Claudia Schiffer. I did not see why I should wait until I was 50 to afford my retirement home.” Mr. Rosen bought his getaway — a hut and five acres — for $10,000.

So how to do it yourself? “Location is everything,” Mr. Bridgewater said. Mr. Rosen agreed; he suggested a south- or southwest-facing structure away from a main road.

Practically speaking, you’ll need to do some research before building your backwoods getaway. Homepower magazine and Mother Earth News are two recommendations from Steve Spence, director of Green-Trust.org, a nonprofit renewable-energy advocate. “But then when it comes to actually getting into it to see if it’s something you want to do for your whole home,” he said, “I recommend taking a travel trailer or an R.V. or a boat or even one room in your house and move that off-grid. Install some solar panels, put in a battery, put in a generator and plug some loads into it and see how it works.”

That’s because energy is usually the first element in disconnecting from the mainstream. “Most people who try to move off-grid tackle their electricity needs first, and solar is by far the most popular source of home-produced electricity,” said Dave Black, author of “Living Off the Grid: A Simple Guide to Creating and Maintaining a Self-Reliant Supply of Energy, Water, Shelter and More” (Skyhorse Publishing), scheduled to be published in October. But, as Mr. Spence noted, every situation is different. Some regions are sunny and work better with solar power; others are overcast and blustery and lend themselves to wind power.

Keep in mind that completely do-it-yourself power systems are expensive. But Mr. Spence added, “If you go grid-tie,” which means connecting your system to the power company’s existing services, “there are federal and state rebates that can pay for up to half your system.” To find out more about these incentives, go to www.dsireusa.org.

The other challenge of completely disconnecting is that you have to be your own power company and do your own maintenance.

The upside, as Mr. Spence sees it, is that the experience will educate you about your energy consumption and how to manage your usage.

“If it’s a nice, bright sunny day and you’re doing the laundry, instead of throwing the stuff in the dryer, you might decide to throw it on the line for a few hours,” he said. “You start adjusting your way of life around some of the natural rhythms of nature.”

But that doesn’t mean giving up the modern world completely. “We have all the goodies,” Mr. Spence said of his own home in upstate New York. “We’ve got the large-screen L.C.D. TVs, high-speed Internet, microwave and the standard stuff you would find in a normal home. We just have to run it off the sun.”

Sadly, many seniors are unable to access this resource without selling their homes or obtaining an expensive reverse mortgage. Today there’s a new model for helping seniors tap into their equity that may become a widespread alternative in the not-too-distant future.

Until now, if you were over the age of 65, there were few alternatives for using the equity from your home. You could refinance, but you had to qualify, pay points and fees, and make monthly payments.

The other choice was to obtain a reverse mortgage. You could choose to receive your payout as a lump sum, a lifetime monthly payment, a monthly payment for a limited term, a line of credit, or a combination. You would never owe more than the value of the home, regardless of the amount paid out.

Reverse mortgages require points and fees, which usually run about 5 percent of the property value. On a $400,000 property, that’s $20,000. The homeowner must occupy the property as his or her primary residence, and if he or she becomes ill and is away from the home for more than 365 days, the reverse mortgage becomes due and/or the property must be sold.

When the homeowner dies, the property goes to the lender. In some cases, the property may be sold, provided that both the interest and principal paid by the lender can be reimbursed. If this is the case, then the balance could go to the deceased’s estate.

As a rule of thumb, the younger the borrower is (minimum age is 62), the smaller any monthly payment would be. For more information on reverse mortgages, visit the Federal Trade Commission Web site at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm.

Now there’s a new model called Equity Key available to residents of California, Florida and New York who own property with a cumulative value of at least $500,000 and have at least 30 percent equity in their property. Unlike reverse mortgages that are typically limited to primary residences, Equity Key accepts primary residences, rentals, commercial and second homes.

The Equity Key model is an appreciation-sharing model. In other words, Equity Key pays the property owner a specific amount (approximately 12 percent to 15 percent of the property’s value or an annual recurring payment in the approximate amount of 0.9 percent to 2.4 percent of the home’s value.) In exchange, Equity Key takes a partial ownership position and splits any future appreciation on a 50-50 basis with the property owner. The owner retains the equity he or she has accumulated.

When the owner passes away, Equity Key sells the property, and the accumulated equity (all the equity the owner had prior to the Equity Key transaction plus 50 percent of what accumulated subsequently) goes to the owner’s heirs. The homeowner’s estate has the first right of refusal to purchase the property at the current market value.

The Equity Key program is designed for homeowners between the ages of 65 and 85. They must be in good health as well as being able to qualify for a life insurance policy. Ineligible homeowners include those with Type 1 diabetes, those who’ve had recent bouts with cancer, and smokers. Equity Key takes out an insurance policy to protect their interests in case the homeowner dies prior to the time that they recoup their initial investment.

The Equity Key program is different from reverse mortgages in a variety of ways. First, there is no additional debt created. Whatever money the owner receives is his or hers to keep. Like a reverse mortgage, the money taken from Equity Key is not considered income. Therefore, no taxes are due on this distribution.

Instead of paying up to 5 percent in closing costs, the owner pays a small application fee of $300. No credit check is required nor is there an income requirement. If the owner does not meet the Equity Key requirements for some reason, the application fee is refunded.

One of the most important advantages about the Equity Key program is that the owner does not have to occupy the property as his or her primary residence. This means that if the owner becomes ill and has to live elsewhere, the property can be rented rather than having to be sold. Equity Key does require the owner to continue to make repairs, keep the property in good condition, and provide adequate insurance.

Property owners can use this program to fund a down payment for their children without touching their personal nest egg. They could also use the money to update their home to fit their needs as they age. Another use would be to purchase long-term health insurance with an extended care option. Alternatively, it could provide the money they need to live a happy, fulfilling retirement rather than just scraping buy.

Because this Equity Key is a transfer of real estate, they do pay a commission to agents. This is an entirely new way of earning a commission without having to displace an elderly homeowner. It will be interesting to see whether this new model expands to other states as well as to those who may have a smaller net worth.

Are you in the market for a mortgage loan? Whether the loan is to buy a new home or to refinance your existing mortgage, you must shop around. Contact a number of mortgage lenders. Get rate quotes for a fixed 30-year mortgage as well as for adjustable-rate loans.

Find out what the monthly payment will be for each type of loan, but then before you make your final decision, plug in the amount of the mortgage interest that you will be able to deduct.

How do you do this? Let’s look at this example. You find a house that you want to buy and sign a contract for $475,000. You have been saving money for a long time in order to buy your first house, and plan to put down 20 percent ($95,000) and get a loan in the amount of $380,000.

One lender is prepared to lend you this money at 6.5 percent for 30 years, and the monthly payments (exclusive of real estate taxes and insurance) will be $2,402. Another lender has offered you a 5-year adjustable-rate mortgage (ARM) starting at 5.75 percent. This will require a monthly payment of $2,218.

The difference is $184 per month or more than $2,200 per year. Since you are married, file a joint tax return and your taxable income is between $128,500 and $195,800, you know that you are in the 28 percent tax bracket for income tax purposes. Oversimplified, that means that every dollar you pay in mortgage interest can be reduced by 28 percent. So now, after doing the math, the difference between the two types of mortgages is only $132 per month (or $1,584 per year).

It is important to take into consideration the tax deductions available to homeowners when considering what kind of mortgage to get. If you plan to stay in the house for a long period of time, you may be willing to accept the fixed 30-year loan, rather than be subjected to a potentially steep increase five years from now when your ARM will adjust.

It is this very issue that is one of the primary causes of the current “mortgage meltdown” confronting our nation’s homeowners. Many consumers opted for a 100 percent interest-only (or adjustable-rate mortgage) two or three years ago and now have been told that their monthly payment will dramatically increase. These homeowners cannot afford the new payment, and since property values have declined in many parts of the country, they are unable to refinance to get a better mortgage rate.

Let’s look at several interest deductions that can save you money while preparing your 2007 income tax return:

1. Mortgage insurance premiums: If you are able to put down 20 percent or more as a down payment on your home, should you go into default and the home has to be foreclosed, most lenders are comfortable that there will be sufficient equity so that they will not lose any money.

However, if you are unable — or unwilling — to put down a lot of money and want a larger loan, there are two things that lenders can do. They can require that you put down only 5 or 10 percent and give you two loans: one for 80 percent and a second trust for the 10 or 15 percent difference.

Alternatively, they can require that you obtain private mortgage insurance. This is coverage — which the homeowner pays for — to compensate the lender should there be a shortfall between the amount of the money received at a foreclosure sale and the loan balance.

There is also governmental mortgage insurance provided by the Federal Housing Administration (FHA); the Veteran’s Administration (VA), called a funding fee; and the Rural Housing Service, called a guarantee fee.

If you entered into a transaction after Jan. 1, 2007, that included some form of mortgage insurance, you may have the right to deduct these insurance payments as home mortgage interest. However, there are some restrictions. First, the insurance must be in connection with home acquisition debt. This means that the loan is secured either by your principal residence or a vacation home that is not rented out for more than 14 days a year.

The insurance contract must have been issued after Jan. 1, 2007. The deduction is reduced by 10 percent for each $1,000 that the adjusted gross income (AGI) exceeds $100,000 (or $50,000 if you file an individual tax return). If your AGI is more than $109,000 ($54,500 if filing separately) then you cannot take advantage of this deduction.

If you sold your house last year — or refinanced it — thereby cancelling the mortgage insurance, unless the insurance was provided by the VA or the Rural Housing Service, you cannot claim a deduction for the unamortized balance of the premium.

2. Mortgage interest: Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations: acquisition loans up to $1 million, and home-equity loans up to $100,000. If you are married, but file separately, the limits are split in half.

The concept of “acquisition loan” is often difficult to understand. To qualify for such a loan, you must buy, construct or substantially improve your home. If you refinance for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use all of the excess to improve your home or treat it as a home-equity loan.

This can best be understood by an example: You want to take advantage of current mortgage rates, which are still quite low, and refinance your existing $250,000 loan. Your house is assessed for tax purposes at $750,000.

Based on your credit and the equity in your house, your lender is prepared to give you a mortgage loan of $500,000. Because your “acquisition indebtedness” is $250,000, you will be able to deduct interest only up to $350,000 — that is, the acquisition indebtedness plus the maximum $100,000 home equity.

The Internal Revenue Service has ruled that one does not have to take out a separate home-equity loan to qualify for this aspect of the tax deduction. The remaining interest is treated as personal interest, and is not deductible.

3. Seller-paid points: Here’s an area often overlooked by buyers. Points paid to a mortgage lender will reduce interest rates. Each point is 1 percent of the loan, so that on a $300,000 mortgage, a borrower will have to pay $3,000. And typically, for every point that you pay a lender, the interest rate will be reduced by one-eighth of a percent.

When negotiating a real estate sales contract, buyers will often ask the seller to make certain financial concessions so that a deal can be reached. Such concessions include (1) the seller paying some or all of the buyer’s closing costs, (2) the seller giving a cash credit at settlement, or (3) the seller paying some or all of the buyer’s points.

The IRS has ruled that points paid by a seller can be deducted by the purchaser. Let us look at your example. You will pay $450,000 for your new house and obtain a loan of $360,000. The lender can give you a fixed 30-year conventional loan for 6.5 percent, with no points, or 6.25 percent with 2 points, for $7,200. If you can convince your seller to pay this sum — and have your sales contract reflect that the seller is paying this money as points — you should be able to fully deduct the entire payment from your income tax that you file for this year.

There is one drawback to deducting seller-paid points: The amount of the points paid by the seller will be used to reduce the purchaser’s tax basis — the number that will eventually be used to calculate whether a sale results in taxable capital gains. In our example, if you pay $450,000 for the property, and deduct the $7,200 of seller-paid points, your tax basis in the property becomes $442,800 ($450,000 minus $7,200).

Under current tax law, this may not be a problem for home buyers. As will be discussed later in this series of articles, taxpayers who live in their house for at least two years can fully exclude from taxable income up to $250,000 of gain ($500,000 for married couples filing a joint return) on the sale of their principal residence.

Thus, the lower tax basis may not be significant — unless the taxpayer makes a profit that exceeds these amounts.

On Jan. 16, 2008, the IRS announced that it has revised Publication 17, Your Federal Income Tax. According to the IRS, they have “added new features to assist taxpayers to more easily navigate this widely used publication. The online version of Publication 17 now contains electronic links for greater ease of use.”

Two other useful IRS documents are Publication 936, entitled “Home Mortgage Interest Deductions,” and Publication 910, “IRS Guide to Free Tax Services.” It is to be noted that the IRS has cautioned consumers that if a Web site purporting to be from the IRS does not contain the “.gov” suffix, it is not a legitimate IRS Web site.

If the roots of your neighbor’s tree are causing damage to your property, what legal rights do you have? Unfortunately, it depends on where you live.

Over the centuries, our country has grown from a largely agricultural setting to an urban civilization. As a result of these changes, different states have adopted different rules regarding tree law and liability.

On Sept. 14, 2007, the Supreme Court of Virginia reversed its longstanding position by holding that where a neighbor’s tree causes actual harm or poses an imminent danger of actual harm to an adjoining property, the tree owner “may be held responsible” for this harm. Prior to this, Virginia followed what is commonly referred to as the Massachusetts rule, namely that a property owner’s right to protect his property from the encroaching roots and boughs of a neighbor’s tree is limited to self-help. In other words, the property owner has the absolute right to trim the branches and cut to roots — but only on his own property. He cannot enter onto the tree owner’s property, and he cannot sue the tree owner.

In Fancher v. Fagella, the Virginia Court made it clear that its earlier decisions were made “in times when the population was far less densely concentrated than at present, and more often engaged in agriculture.”

To my knowledge, every state in the Union allows a property owner to exercise this self-help. However, some courts have modified this by holding that if self-help causes the neighbor’s tree to die, the tree owner must be compensated by the person who cut down the branches or the tree roots.

Additionally, over the years, four basic theories have evolved as to whether the adjoining neighbor has any legal cause of action over and above self-help.

The Massachusetts rule: As noted above, even if damage is done to the neighbor’s property, that neighbor is limited to self-help. That is the exclusive remedy. Many judges have called this rule the “law of the jungle” because “self-help effectively replaces the law of orderly judicial process as the only way to adjust the rights and responsibilities of disputing neighbors.”

It should be noted that for all practical purposes, Maryland and the District of Columbia follow this rule.

The old Virginia rule: Until the Virginia high court recently reversed itself, since at least 1939 the law there was that the injured landowner is limited to self-help “unless the encroaching tree or plant is noxious and causes actual harm to the neighboring property.”

But last month, the Virginia court acknowledged that it was difficult to determine exactly what is meant by “noxious.”

The Restatement rule: The American Law Institute — a prestigious organization composed of lawyers, judges and professors — periodically issues “restatements of law” on various topics. While such statements are not legally binding on the courts, they do assist lawyers and judges in understanding and interpreting cases. In the Restatement of Torts, promulgated in 1979, it determined that the tree owner has an obligation to control encroachments when vegetation is artificial — i.e. planted or maintained by a person — but not when the encroachment is natural. In other words, if you planted your tree, and it causes damage to your neighbor, you may be financially responsible for this damage.

Most states rejected this theory, simply because it is often impossible to determine whether a tree is “artificial” or “natural.” If you just moved into your new home, you have absolutely no way of knowing the origin of your trees.

The Hawaii rule: In 1981, the high court in Hawaii further modified the self-help rule. Normally, the court said, living trees and plants are not nuisances. While it may be an inconvenience for the neighbor if the trees next-door cast shade or drop leaves, flowers or fruit, this is not actionable at law. However, “when they cause actual harm or pose an imminent danger of actual harm to adjoining property,” the neighbor may require the tree owner to pay for the damage and to cut back the endangering branches or roots. And if this is not done within a reasonable period of time, the neighbor “may cause the cutback to be done at the tree owner’s expense.”

In Fancher, the Virginia court carefully considered all of the various rules, and decided to “join the growing number of states that have adopted the Hawaii approach.” Several reasons were provided by the court.

First, it strikes an “appropriate balance” between the competing rights of adjacent property owners.

Second, the court wanted to make sure that frivolous, vexatious lawsuits would be discouraged, while at the same time not precluding a homeowner from recovering where serious damage has occurred. Mr. Fancher’s damage included displacement of a retaining wall between the two properties, blockage of his sewer and water pipes, and impairment of the foundation of his house.

Third, it agreed that limiting the neighbor to the self-help remedy does, in fact, encourage the “law of the jungle.”

Fourth, the other rules in existence — including its own rules — were unworkable and difficult to understand and apply.

And finally, quoting an earlier case in Tennessee, which in 2002 adopted the Hawaii rule, “the rule we adopt today is in keeping with the aim of the law to provide a remedy to those who are harmed as a result of another’s tortuous conduct.”

What does this all mean for a homeowner who is confronted with damage to his or her property caused by the neighbor’s tree?

The first thing you should do is hire an arborist. There are a number of organizations that you can find on the Internet to guide you in locating one in your state and in determining what qualifications are needed.

The arborist must personally inspect the tree (or trees) in question. Under no circumstances can he or she go onto your neighbor’s property, however, unless you get specific written permission from the tree owner. According to Lew Bloch, the author of “Tree Law Cases in the USA,” “Be clear of where the property line is.” In his book, Bloch points out that “aside from possible civil or criminal actions, some states allow for double or treble damages for trespass cases. And remember that trespass does not have to be intentional; it can also be accidental.”

Once you get a written report from your arborist, and assuming that it shows a potential danger, send a copy to your neighbor. Depending on your relationship, I would first approach the neighbor and explain your concerns, and show him or her the report.

In many cases, you may be able to amicably resolve the issues. It is clearly less expensive to agree to split the cost of removing the tree than to litigate.

But if your neighbor is obstinate and insists that “the tree will stay,” then you should consult an attorney knowledgeable about real estate and tree law.

Depending on what state you live in, you may be able to sue the neighbor seeking an injunction, which would require him to remove the tree. If you can demonstrate actual damage to your property as a direct result of the tree growth, many judges will also award you actual damages, based on the legal theory of “private nuisance.” So, for example, if the neighbor’s tree caused $5,000 in damage to your garage, if you can prove this damage, the court may also give you a judgment in this amount.

But litigation is always time-consuming, expensive and uncertain. More importantly, since we follow the “American rule” on attorneys fees, which means that in the absence of a statute or a written agreement each side pays his or her own lawyers, it is doubtful that a court will award you legal fees, even if you win the case.

Of course, if you are in a state that still adheres to the Massachusetts rule, and if you want to take the case all the way to your Supreme Court, there is always the possibility that your court — like the recent Virginia Supreme Court case — will recognize that times have changed and will adopt a more homeowner-friendly rule of law.