DEAR BOB: I am a real estate broker with an opportunity to obtain a listing on a beautiful house. But there is one little problem. The seller says her boyfriend moved out about 15 years ago and she hasn’t heard from him since. When I checked the official title records, I see the seller and the boyfriend (with different last names) hold the title. The seller says they were never married. Is there any way this house can be sold now? The seller has paid all the mortgage payments since the boy friend disappeared 15 years ago. –Evelyn R.
DEAR EVELYN: As a real estate agent, you were very wise to check the title before listing that house for sale. From your description, it appears the title is unmarketable unless the missing boy friend can be found.
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The legal solution is for the mom to bring a quiet title lawsuit. Depending on the exact facts, her attorney can best advise what legal steps to take, such as hiring an investigator and publishing legal notices of the pending lawsuit to clear the title.
If due diligence is used to locate the missing boy friend, and if the court is satisfied he is either dead, cannot be located, or has no title interest in the house, then the court can order the title “quieted” in the seller’s name so she can sell marketable title.
WHAT IS STEPPED-UP BASIS?
DEAR BOB: Please give me more details about “stepped-up basis” for real property. Do you have any information available on this topic? –Elmer B.
DEAR ELMER: When real or personal property is inherited, the heir receives it with a new “stepped-up basis” of market value on the date of the decedent’s death.
To illustrate, suppose you inherit a house for which the owner paid $100,000. But at the time of her death, it is worth $300,000. Your new stepped-up basis will therefore be $300,000, the fair market value on the date of death.
As a regular reader, you know I often say it is better to inherit property than to receive it as a gift before the owner’s death. Stepped-up basis is the major reason.
In the example above, if the homeowner gave you her house before death, as the donee you would take over the donor’s low $100,000 adjusted-cost basis. If you then sold it for its $300,000 market value, you would have a $200,000 taxable gain.
However, if you instead inherit that house after the owner’s death, your stepped-up basis is the $300,000 market value on the date of death so you can then sell it for $300,000 with no tax due. For more details, please consult your tax adviser.
PROS AND CONS OF REVERSE MORTGAGES
DEAR BOB: I am a widow homeowner having a hard time making financial ends meet. My daughters keep telling me I am sitting on a “cash cow,” meaning my house. They keep telling me to get a reverse mortgage. But I recall you said reverse mortgages aren’t always a good idea. If I take out a reverse mortgage, does the bank own my house? –Kay H.
DEAR KAY: To qualify for a senior citizen reverse mortgage, you must be at least 62 and own your house or condo. If you have a small mortgage that is all right because part of the reverse mortgage proceeds can be used to pay it off, so you won’t have any more mortgage payments.
Contrary to untrue myth, the reverse mortgage lender does not “own” your home. You do. But the reverse mortgage lender has a lien or security interest in it, just like a regular mortgage.
When you obtain a reverse mortgage, you have three choices: a lump sum (perhaps to install a new roof or to buy a new car), monthly lifetime income even if you live to 110, and/or a credit line to use when desired (except in Texas).
The reverse mortgage “matures” and must be paid off when you sell the house, move out for longer than 12 months, or die. After the sale of your home, the remaining equity goes to you or your heirs. If your heirs want to keep the house after you die, they can obtain a new mortgage to pay off the reverse mortgage.
The only time I don’t recommend a reverse mortgage is if you don’t plan to stay in your home at least five years. The reason is then the up-front loan costs make a reverse mortgage a bad deal. When I get to be 85 or 90, I’ll probably get one. More details are in my special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” 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.
SHOULD HOUSE TITLE BE TRANSFERRED INTO A LIVING TRUST?
DEAR BOB: A few years ago, my wife and I had our living trust prepared by an attorney who specializes in living trusts. After reading in your articles several times that a living trust is worthless unless title to our house is deeded into our living trust, I contacted him to see if that was done. I was told the deed should not be recorded until after a death, as this gives more flexibility. Now I am very confused. –Hugh D.
DEAR HUGH: After I received your e-mail a few weeks ago, I consulted several fellow attorneys to see if they knew of any reason not to “fund” a living trust with title to the trustor’s home.
They all agreed that if title to a home is not transferred into the trustor’s living trust (with the trustor as the initial trustee) before death, after the owner’s death, the title to the house must be probated (except for small estates). I hate to disagree with a fellow attorney, but I suggest you consult another attorney in your town to see if there is any reason not to transfer title to your home into your revocable living trust.
NO RESALE MARKET FOR A LIFE ESTATE
DEAR BOB: My late father gave my husband and me a life estate in his house after he died. We are now living in the house, but we want to sell it and move to a distant city where my husband has a job waiting. However, I discovered we can’t get much for our life estate, but we need that money for a house down payment in our new city. When we die, the house goes to the church where my late father belonged. Is there anything we can do? –Mary Ann H.
DEAR MARY ANN: Your letter reveals another reason I dislike life estates. They tie up property and cause many unexpected problems, such as in your situation.
The reason there is no resale market for a life estate is when you die, the life estate “dies” or terminates. Then the remainderman (the church) owns the full title.
You could go to the church officials now to see if they might give up their remainder interest in your house in return for a generous donation of several thousand dollars now when you sell the house.
Then you (and the church) can sell the house, obtain cash for your next home’s down payment, and the church gets a cash donation now instead of waiting many years. For full details, please consult a local real estate attorney.
NO EASY WAY TO AVOID TAX ON MORE THAN $250,000 HOME SALE PROFIT
DEAR BOB: I am a widow, age 67. My husband died about four years ago. Now I want to sell my house to move to a better climate and to be closer to my grandchildren. My problem is when I sell I will have about $375,000 net profit according to the real estate agent. Because I have lived in my home many years, I know I am entitled to that $250,000 tax exemption you often discuss. Is there any easy way to avoid paying tax on the excess $125,000? –Victoria W.
DEAR VICTORIA: No. However, if you are a bit adventurous, you could convert your home into a rental property and make an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater cost and equity.
My suggestion is you consult your tax adviser to determine your home’s current adjusted-cost basis.
You mentioned your husband died about four years ago. If you inherited his half of the house that means you received a new “stepped-up basis” to market value on at least 50 percent of the house (100 percent in community property states).
Even if you owe capital gains tax on that $125,000, the current federal long-term capital gains tax rate is only a 15 percent maximum, plus applicable state tax.
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