DEAR BOB: I really related to that movie, “The 40-Year-Old Virgin,” as I was 36 years old when I got married in May (although I was not a virgin). My wife moved into my home, which I wisely bought when I was just 24 (and still a virgin). She wants a larger house and I agree my “bachelor pad” cottage is too small for us to have a family. But my nice problem is if I sell my house, the profit will be around $300,000. Since we will be filing a joint income-tax return in 2005, can we claim a $250,000 or $500,000 home-sale tax exemption? – Gerry H.
DEAR GERRY: Unless your wife has occupied your home as her principal residence at least 24 months before its sale, Internal Revenue Code 121 says you only qualify for one $250,000 principal residence sale tax exemption.
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To qualify for the $500,000 tax exemption of IRC 121, your wife need not be on the title but she must have occupied your home as her primary residence over 24 months before its sale. For more details, please consult your tax adviser.
PROPERTY SURVEY IS BEST WAY TO RESOLVE BOUNDARY DISPUTE
DEAR BOB: My mother allowed a neighbor to attach his fence to hers, which made sense at the time. But his connecting fence is 2 feet or 3 feet onto my mother’s property. The neighbor’s house was recently sold. My mother is upset that part of her property will be sold along with that house. If this is not resolved, my understanding is part of her property will belong to the neighbor. Is this correct? – Lisa H.
DEAR LISA: No. Your mother should obtain a survey to establish the exact boundary with her new neighbor. This will be money very well spent.
If she learns from the survey her neighbor is using part of her lot, but she really doesn’t mind, she can grant written permissive use to prevent losing part of her lot as a prescriptive easement. For more details, she should consult a local real estate attorney.
BIG EXISTING MORTGAGE MIGHT PREVENT A REVERSE MORTGAGE
DEAR BOB: My problem with reverse mortgages is if by age 62 I haven’t paid off my mortgage, I can’t qualify. I still owe about $180,000 on my mortgage, but I have about $300,000 equity. How can I creatively get at that equity to cash it out without paying off my existing mortgage? – James T.
DEAR JAMES: Presuming you are 62 or older, you qualify for a reverse mortgage on your principal residence. However, if you have a $180,000 mortgage with $300,000 equity, that means your home is worth around $480,000.
You won’t receive much or any reverse mortgage benefit in that situation. The reason is the reverse mortgage lender requires paying off the $180,000 existing mortgage in a lump sum payment. The result is little reverse mortgage remaining equity, considering your young age.
A better alternative, presuming you have a job with good income and good credit is to obtain a home equity credit line (that’s really a second mortgage) to benefit from your $300,000 equity. Most home equity lender banks will loan up to 75 percent or 80 percent of your home’s market value.
That’s what I recently did. Although I don’t need cash, when I received a tempting offer from JPMorgan-Chase for a $200,000 home equity credit line at below the prime interest rate, I decided it was a “no brainer” to accept. The “clincher” was they offered me 25,000 United Airlines frequent flyer miles, plus other goodies.
ADDING ADULT CHILDREN’S NAMES TO HOME TITLES HELPS TAX BREAKS
DEAR BOB: You often advise not to add an adult child’s name to a home’s title. But I would like to add my daughters’ names to the titles to receive the tax benefits of the houses they live in but which I own. Can I deed over a 1 percent ownership to accomplish that but not give up control of the houses? – Gladys G.
DEAR GLADYS: If your daughters own (at least a portion) and live in their principal residences, then they are legally obligated to pay the property taxes and mortgage payments. The consequence of their non-payment is losing the house by foreclosure.
Therefore, they are entitled to the itemized interest and property-tax income-tax deductions for the actual payments they personally pay to the property-tax collector and the mortgage lender. For full details, please consult your tax adviser.
BAD NEWS ABOUT PROPERTY GIFT
DEAR BOB: Thanks for your wonderful information every week. I am in the process of having my mother gift me the house where I was raised. What will my basis be? My father gave her the house in 1983 after they split – David F.
DEAR DAVID: The bad news is you, as the donee, take over your mother’s presumably very low adjusted cost basis for the house. That means when you eventually sell the house, unless you then qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly), you will owe a substantial capital gains tax.
You would be much better off inheriting the house after your mother passes on. Then you will receive a new “stepped-up basis” to market value on the date of her death. The result will be little or no capital gain tax if you decide to sell the house shortly thereafter. For full details, please consult your tax adviser.
CAN PROPERTY IN IRREVOCABLE TRUST QUALIFY FOR $250,000 TAX BREAK?
DEAR BOB: I’ve been following your explanations of the Internal Revenue Code 121 principal residence sale tax exemption. However, my neighbor and her husband are considering selling their home. It is in an irrevocable trust. The trust provides for distribution of the trust assets on Jan. 1, 2006. Her CPA told her that although she has lived in the property over five years, because she won’t become the owner until Jan. 1 she won’t qualify for the IRC 121 exemption until 24 months after that. Do you agree? – Fred M.
DEAR FRED: Yes. Irrevocable trusts to hold title to real estate are usually a major mistake, as in this situation. Your neighbor’s circumstance means she cannot qualify for the $250,000 IRC 121 exemption until Jan. 1, 2008, although she has lived in the home as her principal residence well over 24 months.
The reason is IRC 121 requires her to have owned the property at least 24 months. For more details, she should consult her tax adviser.
IS BUYER’S CREDIT SUBJECT TO EVALUATION ON A LOAN ASSUMPTION?
DEAR BOB: If I want to buy a home and assume the existing mortgage, will the lender evaluate my credit report? – Mary S.
DEAR MARY: Yes. When you purchase a home and specify in your purchase offer you want to assume the existing mortgage, the lender will evaluate your income, credit report, and FICO (Fair, Isaac and Co.) credit score.
However, my experience has been lenders are not so tough on mortgage assumptions as they are on original mortgage qualifications. The worst that might happen is the lender could demand an assumption fee around 1 percent of the mortgage balance.
If the existing lender is unreasonable and demands full mortgage payment, after you hold title, just refinance with another lender.
CONDO RENTAL OWNER NEEDS LANDLORD’S INSURANCE POLICY
DEAR BOB: We recently bought a condo in Naples, Fla., and plan to rent it out when we are not using it. My husband is a physician. I am concerned about the liability if a tenant falls or is injured in the condo. What are your thoughts on placing the title in a LLC (limited liability company)? – Beth R.
DEAR BETH: You and your husband need a condo landlord’s rental insurance policy for at least $300,000 liability coverage, plus a personal umbrella insurance policy for at least $3 million from the same insurance company.
Be sure to purchase these policies from a Florida insurance agent representing a reputable insurance company. Such coverage should well protect you and your wealthy husband if a tenant or a guest trips over the carpet.
As for changing your title to an LLC, if a tenant is severely injured, it is relatively easy to “pierce the corporate veil” to reach your assets. Adequate insurance is much better. For more details, please consult a Florida real estate attorney.
The new Robert Bruss special report, “The 10 Key Questions Condo Sellers Hope Their Buyers Don’t Ask,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or www.bobbruss.com. Questions for this column are welcome at either location.
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