Don't refinance just to put name on loan

Q: I just sold a house I owned alone, and moved into a house that my fiancé and I will share. The issue we're facing is that the mortgage on this new house is in his name only.

Instead of refinancing and putting my name on the mortgage, he wants to have me put on the deed with a quitclaim deed. I have substantial equity to add to this new property and don't want to get screwed if the relationship doesn't work out.

My question is should I insist on refinancing so my name is added to the mortgage along with the deed? Or is being on the deed enough to protect my assets?

A: Believe it or not, your fiancé may be giving you the better half of the deal.

By adding your name to the title, but not to the mortgage, he is giving you half ownership in the property without any responsibility for making the mortgage payments. Of course, you will contribute equity and cash to pay the mortgage, but you don't have any legal liability for this debt.

If your fiancé has a great rate on his mortgage, you don't want to lose that rate by refinancing. Some day in the future when rates are low enough or when you have to refinance your loan, you can refinance the property into both of your names.

With the current mortgage, you need to make sure, however, that it's getting paid on time, along with the real estate taxes, so that your property (and equity) doesn't evaporate in a foreclosure. If both of you will be contributing to the monthly expenses of the home, I suggest that you set up an online account to pay the mortgage, taxes and homeowners insurance policy automatically. Then, you can make sure enough cash is deposited into the account to make those payments each month.

To protect your interests further, you and your fiancé need to write and sign new wills in which you detail what will happen to the other half of the house you don't own. You can solve this problem by putting the house into both of your names as joint tenants with rights of survivorship. That way, if your fiancé dies, you'll have ownership over the entire house. Make sure your wills cover all of your assets. This is a good time to discuss what each of you has and is bringing to the table.

In addition to wills, you and your fiancé should sign powers of attorney for financial matters and health matters. Be sure your attorney has copies of all of your documents. You should keep executed copies in a safe place as well, such as a safe deposit box.

Money discussions are never easy, but this whole business of putting your name on title is a great opportunity to get it out into the open.

Q: My husband and I are selling our rental property that we purchased for $100,000 in 2001. Along the way we refinanced and currently owe $250,000. We are selling for $300,000. How will our capital gains tax be calculated?

A: The fact that you refinanced likely has little to do with the profits that you have on your rental property.

According to IRS Publication 544, "Sales and Other Dispositions of Assets," your profit is calculated by taking the sales price and subtracting your cost basis. Your adjusted cost basis is the price you paid for the property plus any costs of purchase, plus any capital improvements you made to the property, minus any depreciation you've taken. Capital improvements typically includes structural improvements or the replacement of appliances, mechanical, electrical or plumbing work you've had done and possibly even painting.

If you haven't depreciated the property, then you'll be taxed on the difference between your adjusted cost basis and the sales price -- the difference between $100,000 purchase price and $300,000 sales price. But don't forget that you get to exclude from federal income taxes your closing costs on the purchase of the home and the costs to sell your home.

Assuming, however, that you took $10,000 in depreciation and you have made no improvements to the property, you'd also have to pay tax on the depreciation you previously took. In general and very simplified terms, you'd pay 15 percent in federal capital gains tax. The capital gains tax would be about $30,000 on the $200,000 profit. You would also have to pay 25 percent on the recapture of the depreciation you took on the home. The recapture amount would be about $2,500 on the $10,000 of depreciation you took.

You will also have to pay state income taxes on the sale and those amounts will depend on the state in which you live.

In short, you haven't quite provided enough details for me to calculate this for you. But if you're having trouble doing your calculations, please talk to your accountant or a qualified tax preparer. Some computer tax preparation programs are helpful in assisting you with the numbers and the amount you would owe the federal government and your state government.

If you are looking to buy another investment property, one thing you might consider is doing a 1031 tax-free exchange, also known as a like-kind exchange. If you buy a replacement rental property that costs at least as much as this one does, you'll be able to defer all federal income taxes until you sell the replacement property.

Please talk to a real estate attorney for more details.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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