DEAR BOB: We look forward to your educational and entertaining columns. But now we have a real estate problem we never expected. About a year ago, we bought our home with the help of an adjustable-rate mortgage at 1.95 percent interest. We knew it would adjust after six months to 4.95 percent interest. That was quite a jump in our monthly payment, but we handled it. However, when we received the lender’s Internal Revenue Service 1098 year-end report, we learned our mortgage balance has grown by about $7,800. When I called the lender, I was told the increase was “unpaid interest.” What’s that? –Jerry G.
DEAR JERRY: The lender should have explained the 1.95 percent “teaser” interest rate and your current 4.95 percent interest rate don’t fully pay the ARM interest rate, which probably adjusts monthly, earned by the lender. The unpaid interest you didn’t have to pay was added to your mortgage’s principal balance each month.
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This is called “negative amortization” because you aren’t paying the full amount of interest earned by the lender.
The result is you are not building any equity by reducing the mortgage balance, which is growing each month instead of slowly declining as with an amortized mortgage.
Negative amortization ARMs keep your monthly payments low. Hopefully, your home’s market value appreciates faster than your mortgage balance increases. Now you know why I never recommend negative amortization ARMs.
WHO DETERMINES “WASTE” BY A LIFE TENANT?
DEAR BOB: My husband and I have a life estate in a 60-year-old house. We can live in it until we both die. However, the house is not in good condition. It has dry rot, mold, and an infestation of ants. What concerns me, since my husband’s daughter is his conservator who will receive the house after we’re both dead, if I survive my husband she could have me thrown out for “waste,” as you described in a recent article. My husband’s family is nice enough to me now, but things could change if he dies first. –Nancy H.
DEAR NANCY: I think you’re really asking, “Who determines if ‘waste’ of a property is sufficient to terminate a life estate?”
If the remainder-man (your husband’s daughter) becomes alarmed at the lack of maintenance of the house, which she will possess after you both die, she can bring a lawsuit for “waste” to terminate the life estate. It is then up to the court to determine if the life tenant is allowing the house to badly deteriorate (called “waste”) and if the life estate should therefore be terminated.
I suggest you avoid discussing the condition of the house with the daughter and do your best to maintain it, especially to have the ants exterminated. For more details, please consult a local real estate attorney.
LET LENDER DETERMINE REVERSE MORTGAGE ELIGIBILITY
DEAR BOB: My wife and I, in our 70s, are considering a reverse mortgage. We own a free-and-clear condo worth about $500,000. However, it is in a small complex of only three units. We have been told our unit won’t qualify for a reverse mortgage. Is this true? –Gene B.
DEAR GENE: I suggest you consult a representative who handles FHA, Fannie Mae, and Financial Freedom Plan reverse mortgages to see if your situation qualifies with any of these lenders. Generally, Financial Freedom Plan is the most flexible. The best place to find local reverse mortgage originators is on the Internet at www.reversemortgage.org.
IF YOU’RE NOT MARRIED, YOU MUST BE ON TITLE FOR $250,000 TAX BREAK
DEAR BOB: My fiancée and I both own homes. We want to sell his, after meeting the 24-month requirement for ownership and occupancy to qualify for the $500,000 tax exemption. He has lived there about 10 years. Other than being married in the year of the sale, how do I prove two years of occupancy? Must I live there full-time? After the two years are over, I would like to move back into my own home. My CPA says I don’t have to live there at all. We need the full $500,000 exemption. –Bonnie T.
DEAR BONNIE: My first suggestion is to fire that CPA for giving bad advice. Your future husband already qualifies for his $250,000 principal residence sale exemption of Internal Revenue Code 121 because he owned and occupied his home 24 of the 60 months before its sale.
However, if you are to qualify for an additional $250,000 exemption you must occupy the home as your principal residence at least 24 of the 60 months before its sale. If you are not married on the date of the sale, then your name must have been on the title at least 24 months to qualify.
But you indicate you will be married by the date of the sale of his house. In addition to proving your 24 months of occupancy, you must also file a joint tax return in the year of sale. For more details, I suggest you consult a new tax adviser.
DEEDING HOME TO CHILDREN COULD BE COSTLY TO ALL INVOLVED
DEAR BOB: When I die, I want to leave my home to my four adult children. If I take my name off the title and put their four names on the title now, will this action avoid probate when I die? I can’t afford one of those revocable living trusts you recommend. –Josephine A.
DEAR JOSEPHINE: Your plan could be very bad for you and your adult children. By deeding your house to your children now, you give up control.
For example, suppose your health declines and you need to sell the house to provide funds for your care in an assisted living or convalescent home. If you give away the house now, you won’t have it available to sell when you need its cash proceeds.
Yes, deeding the house to your adult children now avoids the need for its probate after your death. But the gift does a disservice to them because they will take over your presumably low adjusted-cost basis. When they eventually sell your home, they will probably have a substantial capital gain tax to pay.
A simple living trust prepared by an attorney shouldn’t cost more than $1,000, possibly much less. With a living trust, you can maintain control of your home while also providing for avoidance of probate costs and delays when you die. 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 delivery at www.bobbruss.com.
NAME ON IRS FORM 1098 DOESN’T LIMIT WHO GETS TAX DEDUCTION
DEAR BOB: Last August my fiancée and I bought a house together with equal ownership. Both names are on the title and the mortgage. The lender’s IRS 1098 form we received for 2005, however, lists both our names but only her social security number, although I am the person who made all the mortgage payments. The bank says they can’t change the social security number for 2005, but they will do so for 2006. What should I do? I tried contacting Wells Fargo Mortgage but they are impossible to reason with. –Lorne C.
DEAR LORNE: Don’t worry. Calm down. Because you paid the 2005 mortgage payments and you are on the title to the house, you are entitled to deduct the mortgage interest you paid (and the property taxes if you also paid them).
Although it is very unlikely the IRS will audit you on this issue, be prepared to show your canceled checks or other evidence of mortgage interest payments. Of course, be sure your fiancée doesn’t claim the same interest deduction on her tax returns.
CAN MOM GET BACK HOME TITLE?
DEAR BOB: About six years ago, I deeded the title to my house to my son and daughter-in-law. Now they are getting a divorce. Although I have a life estate in my house so they can’t kick me out, the daughter-in-law wants half the value of my house in the divorce settlement. Is this legal? Can I get my house back? –Harold V.
DEAR HAROLD: Anything can, and frequently does, happen in divorces. This situation shows another reason why it can be a major mistake to give property away before death.
If you signed an irrevocable deed, you can’t get the title to your house back. But the valuation of the house in the divorce settlement will be decreased from fair market value because of your life estate. However, the court will surely consider the daughter-in-law’s remainder share of the house in the divorce settlement.
The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” 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 delivery at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
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