DEAR BOB: About two years ago, we refinanced our home mortgage and obtained a 5.25 percent fixed-rate mortgage. We loved the low monthly payments. Then, about six months ago, my wife inherited enough money to pay off our mortgage in full, which we did. Next, I received an excellent buy-out offer from my employer to take early retirement, which I did. But now my former employer drastically cut my retirement pension and eliminated health care coverage. As I am only 63 and my wife is 57, we are not yet eligible for Medicare. I took early Social Security, but that doesn’t help much. We are rapidly eroding our savings, which were drawn down when we paid off our mortgage early. We “maxed out” our home equity credit line and can barely afford the payments. What can we do? –Richard R.

DEAR RICHARD: Your situation shows why I constantly recommend not prepaying a mortgage in full unless you have so much money you will never need to borrow on your home equity. Obviously, that is not your situation.

Because you have insufficient income to qualify for a new home mortgage, except perhaps from a “loan-to-own” mortgage shark, your only viable alternative is a senior citizen reverse mortgage.

However, there is one little problem. Your wife is too young. To qualify for a reverse mortgage, she would have to quitclaim her half of the house to you.

Because you are only 63, with a long life expectancy, you won’t qualify for much monthly lifetime reverse-mortgage income. I wish I could be more positive, but now you know why I do not recommend prepaying mortgages unless you have lots of spare cash.

NO TAX DEDUCTION FOR CO-OWNER WHO DOESN’T PAY THE BILLS

DEAR BOB: I own our home with my wife. We added our adult son’s name to the title so we could qualify for the mortgage. But we take the standard deduction and do not claim the mortgage interest and property tax deductions. My son has his own house. Can he claim our home’s mortgage interest and property tax deductions for a second home although he does not pay anything and his name is on the mortgage and the deed? –Kisan C.

DEAR KISAN: If your son did not pay the tax-deductible expenses of mortgage interest and property taxes, although his name is on the title to your home, he cannot claim those itemized deductions on his personal tax return. For full details, he should consult his personal tax adviser.

CASH TAKEN OUT OF A TAX-DEFERRED EXCHANGE IS TAXABLE

DEAR BOB: If we sell our investment property for $600,000, and net $300,000 after paying the mortgage and expenses, does our replacement property have to cost $300,000 or $600,000 to qualify for tax deferral? We would like to sell our investment property and use the $300,000 cash to buy a single-family rental house to own free-and-clear. –Susan L.

DEAR SUSAN: To qualify for an Internal Revenue Code 1031 tax-deferred exchange, you must trade equal or up in both price and equity. That means if you sell your investment property for $600,000, you must acquire a replacement investment property costing at least $600,000 without reducing the mortgage balance.

Buying a single-family rental house for only $300,000 means you will owe tax on approximately $300,000 capital gain. If you take any cash out of the exchange that is taxable “boot” because it is “unlike-kind” personal property. More details are in my special report, “How the New Tax-Deferred Real Estate Exchange Rules Can Make You Very Wealthy,” 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.

***

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