No benefit to refi with current lender?
High closing costs could kill deal
October 26, 2009
By Benny Kass
Inman News®
DEAR BENNY: I am shopping for a new mortgage (I will refinance about $160,000 remaining on a condo worth about $300,000) and discovered my mortgage holder wants about $2,200 in closing costs. I just financed with this bank three years ago and have stellar credit. There seems to be no special benefit for refinancing with this lender. Their broker told me as much. I don't understand why they wouldn't want to keep a good customer. Any insight? --Janelle
DEAR JANELLE: I am not a defender of banks, but just because the bank performed a title search and a refinance three years ago does not mean that there are no clouds (i.e., impediments) on your title now. The bank must have clear title in order to make you a loan. Accordingly, it must again perform a title search. Additionally, there are administrative costs that have to be paid because the lender will have to look at your financial situation again.
There will also be closing (escrow) costs to the settlement attorney or title company.
My suggestion is to shop around. Rates are now quite low and mortgage money is becoming more available. Get some quotes from other lenders (including all costs), and then go back to your bank. Tell them you would like to work with them, but their costs are high, and you want them to give you a discount. If that works, go with your current lender. If not, you have the right to refinance with any lender of your choice.
DEAR BENNY: My husband and I own two properties, and we are in the process of getting a divorce. The house I live in right now with my daughter has equity of about $100,000. My husband moved out already, but now he wants the house back.
The second property we bought together before we got married for $445,000. It's now worth about $200,000, but we owe the bank approximately $400,000. I was the only one whose name is on the loan, but both of our names are on the title.
What would happen to me if we sold both houses after the divorce is final? Is he going to get 50 percent of the equity and I have to pay the loss of the other house by myself or do we get the same equity and divide up the loss evenly? --Jacklyn
DEAR JACKLYN: If you do not already have a divorce attorney, please get one immediately. Different states have different laws regarding spousal rights, so I can provide only general information. In many states, there is what is known as "equitable distribution," which means that depending on how long the parties have been married, both husband and wife should share equally in any profits or losses.
Your lawyer should make every effort to negotiate a realistic divorce and property settlement with your husband, which would include, at the very least, a 50-50 arrangement regarding both properties.
DEAR BENNY: In addition to our primary residence, my husband and I own a commercial property that houses our business on the first floor and a residential apartment on the second floor. We currently rent out the apartment. The property is zoned commercial (C-4), dual use.
Before selling this property, is there any advantage to selling our primary residence and moving into the second-floor apartment for two years to establish residency? Since each floor is 1,250 square feet, would we then be exempt from paying capital gains taxes on that portion of the profit from the sale that represents the residence? And if so, in determining what portion is considered residential use, would the land that surrounds the building (approximately 4,000 square feet of concrete driveway/parking lot) be considered part of the commercial property although part of this area would be used for parking our personal vehicles as well as customer parking? --Pauline
DEAR PAULINE: Excellent suggestion. The law that allows homeowners to exclude up to $500,000 of gain is not a "once-in-a-lifetime" situation. It can be used over and over again. The only conditions are that the property must be owned and lived in two out of the five years before it is sold.
So, you can sell your current home and if you have owned and lived there for the requisite period of time, you can exclude up to $500,000 of your profit. In fact, if you have lived in that property for a long time, you can even move into the upstairs apartment now, so as to start the clock running on the second exclusion. However, be careful -- if you cannot sell your current house within the next three years, you will lose the right to exclude the profit.
And here's another suggestion: When you sell the second property, you have the right to do a 1031 "like-kind" exchange on the first-floor business, and at the same time take the exclusion for the upstairs apartment. This would mean, however, that you will have to be a landlord for at least one or two years on the replacement property that you obtain through the exchange. Talk with your financial advisers about this.
As for allocation of the parking area, I really don't know how the IRS would treat this. I suspect, however, that if you carefully allocate the square footage for your personal usage as compared to the business operation, that calculation would be acceptable.
DEAR BENNY: My mother recently passed and her wish was that her estate be divided equally among her four children. My three siblings and I inherited three properties from her. Two of those were rental properties, of which one has been sold. We will soon be closing on the second. I just recently became aware of the 1031 tax exchange. Would it apply to one or more of us if we decided to use that money from the sale to invest in another rental property or only if all the money went to said property? --Pat
DEAR PAT: You cannot do a 1031 (Starker) exchange -- also called a "like-kind" exchange -- after you have sold a piece of property. The law specifically states that a person who wants to exchange one investment property for another cannot have access or control of the sales proceeds; the money must be given to an escrow agent (called a qualified intermediary) who then turns the money over to buy the replacement property.
On the remaining property, it is still possible to do a 1031 exchange. But you have to determine what profit you will make when you sell it. If you will not make a lot of profit (gain), it may make sense just to pay the capital gains tax and keep the rest of the sales proceeds.
When your mother died, you most likely are eligible for what is known as the "stepped-up basis." (Note that the laws are different in community property states, and you have to discuss your situation with your financial advisers). Oversimplified, the "stepped-up basis" means that the value of the property on the date of death is your new tax basis.
Let's take this example: Although your mother bought the property for $100,000, on her death it was appraised at $500,000. If you sell the property for that amount, you will have made no gain, and thus will not have to pay any capital gains tax. On the other hand, should you be able to sell for $600,000, the tax will only be on the $100,000 difference. The current federal capital gains tax rate is 15 percent, so you will have to send the IRS a check in the amount of $15,000. You may also have to pay any applicable state or local tax.
So, do your homework and talk with a financial adviser before you decide whether to do a 1031 exchange.
DEAR BENNY: Can you tell me what steps a board of directors/management company should take in the event a water-damage claim against the master policy is made by a condo owner? Should the board/management company investigate, take pictures of the damage, and stay actively involved throughout the claims process or merely turn the whole matter over to the insurance company and, in the event of litigation, its attorney? --Paul
DEAR PAUL: That's a very good question. On the one hand, the board -- which has a fiduciary duty to the owners -- must make sure that the claim is being processed correctly and honestly. On the other hand, boards of directors are volunteers, and must be able to rely on the professionals who are paid to assist, including management.
I think the answer lies somewhere in between doing nothing and being too proactive. Management should monitor the progress of the claim and make sure that the insurance carrier has taken pictures of the water damage. Management should also confirm with outside consultants that the amount of money the carrier is prepared to pay is sufficient to make the repairs. And since insurance companies usually have their own contractors to do the repair work, management should also periodically monitor the work to determine whether it is being done correctly.
And management should submit a status report to the board on a monthly basis.
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.
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