DEAR BOB: I have a negative amortization mortgage on my rental property. I pay only the minimum required monthly payment, which doesn’t even cover the full interest payments, so my mortgage balance keeps growing. When I sell or do an Internal Revenue Code 1031 tax-deferred exchange, how will my capital gains be calculated? Will the interest I didn’t pay affect the calculation of my capital gain? – Hazel O.

DEAR HAZEL: No. Your mortgage balance has absolutely nothing to do with your capital gain when selling real estate. The capital gain is the difference between your adjusted cost basis and your adjusted sales price.

Purchase Bob Bruss reports online.

The adjusted cost basis is your purchase price, plus most closing costs that were not deductible at the time of purchase, such as transfer fees you paid, plus capital improvements added during ownership, minus depreciation deducted on your tax returns.

The adjusted sales price is your gross sales price minus selling expenses, such as the sales commission, transfer fees, and other closing costs.

The difference between these two numbers is your capital gain, which will be tax-deferred if you make a qualifying Internal Revenue Code 1031 exchange for another investment or business property of equal or greater cost and equity. For full details, please consult your tax adviser.

MORTGAGE LENDERS DECIDE YES OR NO BASED ON YOUR CREDIT

DEAR BOB: Can a mortgage lender judge a prospective borrower’s credit based on incorrect information in the consumer’s credit report if that report shows the item is in dispute? – Antoinette A.

DEAR ANTOINETTE: Institutional mortgage lenders can and do rely when making their lending decisions on credit reports from the three national credit bureaus, TransUnion, Expedia, and Equifax. Lenders also receive your FICO (Fair, Isaac Corp.) credit scores.

That’s why you should have any credit report errors corrected before you apply for a mortgage. The best place I’ve found to check all three of the credit reports is at www.myfico.com. The cost is about $45 for all three of the credit reports, including your FICO scores.

If you spot any errors, be sure to contact each credit bureau and ask for “verification” within 30 days. If the credit bureau is unable to verify the incorrect information within 30 days, the wrong information must be removed from your credit report. Be sure to ask for a corrected credit report after 30 days.

HOW TO FIND A PROPERTY OWNER

DEAR BOB: This question may sound ghoulish, but a house in my neighborhood is now vacant due to the death of the elderly owner. I never met her, but I believe she has no family. The house looks like it needs lots of work, but it is in a great location. How can I find who owns it and how do I make a purchase offer? – Bill L.

DEAR BILL: The best place to start your detective work is the county court house where public property tax records are kept. Check the address where the property tax bills are mailed. If tax bills go to the vacant property address, on the envelope below your return address mark, “Address correction requested.” Your letter will be forwarded, but for a mere 70 cents the post office will then give you the forwarding address. If your letter is returned to you, then you know there is no forwarding notice on file at the post office.

Another great source is to ask the neighbors. They usually know about the adjoining homes and who is involved with them.

For example, the owner of a vacant house adjoining mine died about three years ago. I met his heirs and know where to find them if I need to do so.

Your detective work should pay off. It sounds like you are on the trail of a bargain.

WHAT IS THE BEST TIME OF MONTH TO BUY A RENTAL PROPERTY?

DEAR BOB: I am considering the purchase of a multifamily home. What is the best time of the month to close on this purchase to benefit from pro-rated rents and security deposits held by the seller? – Diana D.

DEAR DIANA: Concerning the tenant security deposits, it doesn’t matter what time of the month you close your purchase. You will always be credited for the full amount of the tenant security deposits.

If you are getting a new mortgage, it’s best to close on the last business day of the month. However, if that day is a Monday, close by the prior Friday. The reason is if you close on a Monday, you will be charged mortgage interest over the weekend because the loan will be funded on the prior Friday.

If you are taking over an existing mortgage, it’s best to close very early in the month because the seller is liable for the mortgage payment on the first day of the month, but you will be credited for the pro-rated rents collected by the seller on the first of the month.

The new Robert Bruss special report, “How to Avoid Buying or Selling a Bad ‘Lemon House,” is available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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