DEAR BOB: I especially enjoy your articles about senior citizen reverse mortgages. I have clipped and saved them. I am a 65-year-old widow and own my home valued around $550,000. I would like to do some remodeling and am thinking of taking a reverse mortgage lump sum for about $50,000. What will that do to my income tax situation? I also own four rental properties and have a comfortable retirement income. Will the reverse mortgage put me in a higher income tax bracket? – Judith H.
DEAR JUDITH: A reverse mortgage will have no effect on your income taxes. You don’t even need to report the income. There’s a very good reason. Borrowed money is tax-free.
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The only time reverse mortgage could affect your financial situation would be if you were receiving SSI (supplemental security income) or Medicaid (Medi-Cal in California). If SSI or Medicaid recipients don’t fully spend their reverse mortgage income each month then their benefits can be reduced. But that doesn’t sound like your situation.
I suggest you evaluate all three reverse mortgage plans: FHA, Fannie Mae and Financial Freedom Plan. Your eligibility amount is based on your age and your home’s appraised market value. There is no personal liability. Repayment occurs only when you sell your home, permanently move out, or die.
You can elect to receive up to your maximum amount as a lump sum, credit line (except in Texas), lifetime guaranteed monthly income (even if you live to 110), or any combination. More details are in my special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” 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.
CAN A HOUSE CO-OWNER BORROW ON HER SHARE ALONE?
DEAR BOB: Thank you for your recent article explaining joint tenancy with right of survivorship. I own a house in joint tenancy. But I have substantial credit card debt and am thinking of filing bankruptcy. Is there any way I can use my share of the joint tenancy property to get out of debt by borrowing on my share? Would that break up the joint tenancy? –Normel M.
DEAR NORMEL: Yes, it is possible for a real estate joint tenant to borrow against his or her share of the property alone. However, most institutional lenders will not make such loans because of the possible complications and high risk.
Your best source will be a local “hard money” mortgage lender. These mortgage brokers usually represent wealthy individuals who want to earn high returns on their money. The interest rate won’t be cheap and the loan fee can be substantial.
For the lender’s safety, the lender will probably want the title changed to tenants in common. The obvious reason is if you die before your joint tenant dies, then your interest in the property automatically terminates and your joint tenant co-owner owns the entire property. To find a local “hard money” mortgage broker, consult the phone book yellow pages or the newspaper classified ads under “real estate loans.”
DOES LISTING AGENT GET A COMMISSION FOR BUYING THE HOUSE?
DEAR BOB: If a listing agent buys a house he has listed for sale, is it common practice for that agent to receive a sales commission? –Mary Ann L.
DEAR MARY ANN: When a listing agent buys his/her own listing, that agent’s broker usually wants part of the sales commission that would be earned if the listed house were sold to a third party. However, the listing agent usually prefers a reduced sales price or discount so the listing agent doesn’t owe income tax on any sales commission.
There was a recent California Court of Appeals decision on this issue (Horning v. Shilberg, 29 Cal.Rptr.3d 717) where the listing agent who was buying the listed property sued for a $21,000 sales commission when the sale fell through due to the seller’s breach. The buyer-broker lost. The judge explained any sales contract between the seller and listing agent-buyer is, in essence, an agreement to a reduction of the purchase price. For more details, please consult a local real estate attorney.
HOW TO DETERMINE “STEPPED-UP BASIS” ON INHERITED PROPERTY
DEAR BOB: Although I understand all the benefits of holding title to my house and other real estate in revocable living trusts, my question is will my heirs be entitled to receive the “stepped-up basis” benefits for inherited property that you often discuss? What establishes that stepped-up basis? –Richard J.
DEAR RICHARD: Yes. Your heirs named in your living trusts for each of your properties will be entitled to the stepped-up basis of market value on the date of your death. Your living trusts are just a title holding method, such as joint tenancy or tenants in common, which have no effect on the tax benefits for your heirs.
After you die and property title is distributed to your heirs, they should document its market value at that time, such as by a professional appraisal.
I must congratulate you on holding title in separate living trusts for each property. This is very smart because if you sell a property, or decide to amend its living trust for some reason, that action doesn’t affect your other properties and their living trusts. More details are in my special report, “24 Key Questions: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” 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.
DON’T LOSE A GOOD MORTGAGE OVER SMALL JUNK FEES
DEAR BOB: We are buying a home and have obtained a fixed-interest-rate-mortgage commitment. The sale should close within a few weeks. But I am worried the mortgage broker will attempt to tack on those junk fees you warn about. His good faith estimate of loan fees already includes title insurance, escrow charges, appraisal, $250 application fee, and $350 underwriting fee. What other fees should we anticipate? –Gloria C.
DEAR GLORIA: So far, you’re doing fine. Don’t lose a good mortgage arguing over mortgage lender small junk or garbage fees. The $250 application fee and the $350 underwriting fee are very modest junk fees.
If you aren’t paying a loan fee, usually called “points” (each point equals one percent of the amount borrowed), you probably have a very good deal.
I suspect your mortgage broker is earning his fee from the lender’s “yield spread premium” kickback. It’s perfectly legal.
To illustrate, suppose the mortgage market rate is 6 percent on the day your loan closes but you agreed to pay 6.25 percent interest. The lender will share that bonus with your mortgage broker.
HOME BUYER SHOULD EXPECT ZERO BUYER’S AGENT FEES
DEAR BOB: I was incensed by the recent item in your column about the buyer’s agent who demanded his buyer pay a $295 “transaction fee” on top of the buyer’s agent half of the home sales commission received from the seller. Please advise us what are legitimate fees and what garbage or junk fees we should expect from a buyer’s agent –Lee D.
DEAR LEE: As a home buyer, you shouldn’t expect to pay any fees to your buyer’s agent. He or she will be very well compensated by receiving 50 percent of the sales commission paid by the home seller to the listing agent.
The only exception occurs if your buyer’s agent shows you a “for sale by owner” (FSBO) house or condo where the greedy seller refuses to pay the customary half of a customary sales commission in the area. However, most FSBO sellers are so glad to see a buyer’s agent bring a buyer they usually eagerly agree to pay that agent a typical 3 percent buyer’s agent sales commission.
MORTGAGE LENDER CAN’T CALL LOAN DUE WHEN BORROWER CREATES A LIVING TRUST
DEAR BOB: You often mention the advantages of placing a home’s title into a living trust. However, I believe mortgage lenders can then demand payment of the mortgage in full. Also, I have heard of property tax assessors raising the property tax assessments –David M.
DEAR DAVID: Mortgage lenders cannot enforce a due on sale clause when title is transferred into a living trust if the trustor and beneficiary remain the same. The federal Garn-St. Germain Act is very specific a due on sale clause cannot be enforced when the borrower creates a living trust and the borrower remains the initial beneficiary. However, if the lender asks, you must supply a copy of your living trust to the lender.
As for property tax reassessments, the same principle applies. If your local tax assessor attempts to reassess based on the title transfer into your revocable living trust, a polite phone call or letter explaining the transfer is for estate planning purposes and you are still the living trust beneficiary should resolve the issue.
The new Robert Bruss special report, “Foreclosure and Distress Property Profit Secrets,” is now 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.
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