Pros and cons of annexing your property

Despite lifestyle benefits, hidden costs exist

DEAR BENNY: Our double-lot property is at one end of an unincorporated island in the midst of a city of 13,000. The extra amount we pay for water/sewer surcharge and county trash pickup is currently about the same as what the extra taxes from being annexed would be. We like the idea of being able to vote for the officials in the city that has such an impact on our surroundings.

We are considering annexing our property into the city but would like to weigh the pros and cons. –Brian

DEAR BRIAN: Annexation in general means that your property becomes part of the city, and is no longer an unincorporated area. You will have to determine the annexation process used by your city since the process can differ from state to state.

There are advantages and disadvantages. In general:

Pros: Perhaps the primary reason for wanting to become a part of the city is to avail yourself of all of the services provided by that city. Currently, you are paying for water and trash pickup; there will no charge if you are included in the city. Additional benefits include street maintenance, lighting and snow removal (if applicable), health protections, and free access to parks and recreation.

Equally important, it is my understanding that since annexation provides more services, property values increase when annexed to the city. And this means that your house will most likely be more marketable.

Cons: Taxes will no doubt increase. You would be subject to more restrictive local ordinances, regulations and licensing requirements. I have heard about towns being sued or recently filing for bankruptcy relief, so you may have some indirect liability as a citizen of that town.

I would talk with the town’s attorney and get more details and information before you take the plunge. I don’t really know if your double lot will be an issue, but presumably the town’s lawyer should be able to assist.

DEAR BENNY: It seems like there is no way to get out from under an underwater mortgage for people who are making their mortgage payment on time.

My daughter, a county police officer for six years, purchased a townhome with a state-sponsored interest-only loan right before the housing market went down. After five years, she tried to renegotiate with the lender for a 30-year loan, but with no luck.

Other lenders will lend up to 90 percent of the appraised value, but she paid about $160,000 and now the townhomes are selling for $120,000 at best. There’s no way she would ever be able to come to the table with that much cash. She is basically paying rent with taxes and will never be able to pay this off.

Sometimes I think she would be better off with a foreclosure. If she had missed payments, the lender would have worked with her. Any suggestions? –Jan

DEAR JAN: I cannot recommend that your daughter let her house go by way of foreclosure. Not only will she be out of her house, but, more significantly, she will damage her credit rating. It will take a long time for her to repair her credit.

Has she explored the various local, state and federal programs that are available to homeowners who are in similar situations? She works for the county; she should contact the appropriate agency within the county. Clearly, the county should be able to provide some level of assistance for its own employees.

Do you have any resources that can assist your daughter? Can you gift her some money so that she can refinance her mortgage?

I know it may sound like a "cop-out," but my advice is to hang in there. Your daughter is getting tax deductions for the mortgage interest and real estate taxes she is paying. And hopefully down the road, property values will start increasing. We are seeing evidence of this now in many parts of the nation.

DEAR BENNY: Unfortunately, my parents don’t believe me when I tell them it’s always better to inherit a home because the person who inherits gets the "stepped-up" basis after assuming the home at its current market value. What’s the correct answer? –David

DEAR DAVID: You are absolutely correct. If your parents gift you their house now, for tax purposes, their basis becomes your basis, i.e., "the giftee’s basis is the giftor’s basis."

Basis is one factor in determining profit or loss.

On the other hand, if you inherit the house on their death, you get what is known as the "stepped-up" basis. That means that the value of the property on the date of death becomes the tax basis.

Let me give you an example: Your parents bought the house many years ago for $100,000. Their tax basis is $100,000. For purposes of this column, I am ignoring such matters as major improvements made to the house, which will increase the basis.

Now, they give you the house. Let’s say it’s now worth $400,000. Your basis is $100,000. If you decided to sell (and could not take advantage of the up-to-$250,000 (or, if married and filing a joint tax return, $500,000) exclusion of gain, you will have to pay capital gains tax.

So let’s say you sell it for $400,000. Again ignoring real estate commissions and other sale-related expenses, you have made a profit of $300,000 ($400,000 minus $100,000). The federal tax rate currently is 15 percent, so you will have to send a check to the Internal Revenue Service in the amount of $45,000. And you may have to pay state and local capital gains tax as well.

Change the facts: Your dad died when the property was worth $200,000. Remember that the tax basis for each of your parents was $50,000 (since they bought the house for $100,000.) Your mother gets the stepped-up basis for half of the house (your father’s share) so now her basis is $150,000 ($100,000 plus $50,000).

Now, the house is worth $400,000 and your mother dies. Your basis is $400,000. If you sell it for the price, you have made no profit and thus will not have to pay any capital gains tax. Obviously, if you sell it for more than your basis, you will have to pay tax on the difference.

There may be, of course, situations where it makes sense for the parents to gift the house during their lifetime. Everyone — including your parents — should consult with their own counsel before making a decision.

DEAR BENNY: I am considering purchasing a vacation/rental property out of state. While I am familiar with real estate laws, terminology and procedures in our state, I am totally unfamiliar with those of the other state. Do you have any suggestions for websites that will get me up to speed on a state’s real estate process? Also, what questions should I ask when interviewing prospective buying agents? We plan to interview at least three, but do not know how to evaluate their effectiveness in an unfamiliar market. –Wes

DEAR WES: While I am sure there is a lot of state-specific information on the Internet, my suggestion is to retain a local attorney in the area where you are considering buying. If you don’t know any lawyer, it is my understanding that most state (or local) bar associations have referral programs. Alternatively, many people find lawyers on the Internet, but that, of course, is always risky.

As for evaluating real estate agents and brokers, once again your local attorney may be helpful, although you want to make sure that the lawyer does not represent the agent he/she is referring.

If I were in your shoes, I would try to interview three brokers: one with a large company, one with a small company and perhaps one who is a sole practitioner.

You should choose an agent you are comfortable with and who does not try to impress you with how many sales he or she has completed. And, when you finally decide to retain a broker, I suggest that you provide in any contract that you have the absolute right to terminate the contract at any time, with or without cause, provided that the broker has not already located a property for you.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

Contact Benny Kass:
Email Email Letter to the Editor Letter to the Editor


Comments