DEAR BOB: I began getting Social Security last February. Then in May this year I lost my job. A financial adviser suggests I take a reverse mortgage “lump sum” and invest it to supplement my Social Security income. I have no other income and no heirs. My home is worth about $400,000 with a $77, 000 mortgage at 4.25 percent interest, which adjusts by 2 percent next year. I love my home and want to stay here as long as possible. Do you think a reverse mortgage will work for me? –Loral C.
DEAR LORAL: Yes. But I am very worried that so-called financial adviser might have suggested you take a reverse mortgage lump sum so he can sell you an annuity or other investment to earn himself a large sales commission.
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If you want to receive monthly lifetime income from a reverse mortgage to supplement your Social Security income, you can elect that choice direct from the reverse mortgage lender. You don’t need that financial adviser to help you.
However, you will need to use $77,000 of your reverse mortgage entitlement to pay off your current mortgage. Then you won’t have any more monthly mortgage payments.
The balance of your reverse mortgage can be taken as lifetime monthly income, a credit line (except in Texas), lump sum or any combination. 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.
NO TAX ON CONVERTING HOME TO PERSONAL RESIDENCE
DEAR BOB: I am moving into a house I have rented to tenants for several years. I understand that when I sell it, I must pay a 25 percent federal “recapture tax” on depreciation I have deducted on my tax returns. Do I become liable for this tax when I move into my house? Or will it become due when my heirs or I sell the house? –Ruth B.
DEAR RUTH: Converting your rental property into your personal residence is not a taxable event (because no sale takes place). The only time you might owe the 25 percent federal depreciation recapture tax occurs when you sell a former or current rental property.
To fully avoid the 25 percent depreciation recapture tax, you can either (1) make a tax-deferred Internal Revenue Code 1031 exchange of one rental property for another qualifying rental property, or (2) die while still owning the property on which you deducted depreciation. For details, please consult your tax adviser.
EASEMENT USERS GET TO PAY FOR REPAIRS
DEAR BOB: The driveway to our house is shared with two other houses through an easement. The easement is on our lot. As a result, we pay the property tax on it. Are we also responsible for repairs when they become necessary? This seems unfair because we don’t derive any greater benefits from the driveway than do our neighbors. Should we ask our neighbors to contribute each month to a maintenance fee? –Heidi P.
DEAR HEIDI: Regardless of who owns the land beneath an easement, unless there is a written agreement specifying differently, the easement users are to pay the maintenance cost of the easement. Yes, it would be good to get a written agreement with your fellow easement users. But that may cause more problems than it is worth if you try to collect monthly fees toward eventual repairs.
The developer of the three lots should have specified in the recorded easement how repair costs are to be handled. For more details, please consult a local real estate attorney.
NO TAX IS USUALLY DUE ON INHERITED REALTY SALE
DEAR BOB: My son died recently. I am his sole beneficiary. After probate, I will probably sell his house and purchase two annuities for my remaining two sons. Since I will not be eligible for that $250,000 principal-residence sale exemption, will the 15 percent capital gains tax apply? –Mark DeJ.
DEAR MARK: I am sorry to hear about the death of your son. But you probably won’t have to pay much tax when you sell the house you inherited from him.
The $250,000 principal-residence sale tax exemption of Internal Revenue Code 121 only applies to owner-occupants so you can forget about that.
After you receive title to the house from the probate court, your adjusted cost basis will be its market value on the date of your son’s death. When you sell the inherited house, you will only owe capital gains tax on any net amount you receiving exceeding this “stepped-up cost basis.”
For example, let’s say the inherited house was worth $300,000 on the day your son died. Let’s also suppose it is located in a rising market and, after paying all the selling expenses such as the Realtor’s sales commission, you receive $310,000 net. You will therefore only owe the 15 percent federal capital gain tax (plus any applicable state tax) on your $10,000 capital gain in this example. For more details, please consult your tax adviser.
BUILDING NEW HOUSE TO SELL RARELY PAYS BIG PROFIT
DEAR BOB: Seven years ago, we bought a small beach cottage for $82,000. The land is now valued at $270,000, and the house is worth $75,000. My husband and I have a retirement plan that includes living in this cottage for two years before selling so we can walk away with up to $500,000 tax-free profit. But over the last two years, huge three-story “cottages” are being built all around us and selling for well above $1 million. My husband thinks we should tear down our existing cottage, build a larger one, live in it for two years, and then sell. Should we do this and would we have to live in it longer than two years? –Carol H.
DEAR CAROL: Why risk all the inconvenience of construction to possibly sell for the current value of your property, plus the cost of construction? That makes no sense.
Instead, after living in the cottage for two years, just sell for the value of the property as it is. Let some contractor buy it and build a big “cottage” at his risk and inconvenience. Rarely will you earn a big profit in a situation like yours by tearing down the house and building a bigger one before selling.
FLAT-FEE BROKER PROVIDED ZERO SERVICE FOR $1,950
DEAR BOB: We listed our home for sale at $435,000 with a so-called “flat fee broker” who charged us $1,950. The agreement was the home would not be placed in the local MLS (multiple listing service) for 30 days during which we or the broker could sell the house. After 30 days, our listing would go into the MLS and we would pay 2.5 percent to a buyer’s agent who represents a buyer. After 90 days, we have received zero purchase offers and only two showings by other agents. The listing agent didn’t hold any tour for local agents or weekend open houses, and only included our listing twice in his newspaper ads. We feel he provided zero service for $1,950. When we asked for a refund, he said he lived up to the terms of the listing contract, but the local market is “slow.” Do you think we should sue him in Small Claims Court for a refund? –John R.
DEAR JOHN: There are many excellent discount and flat-fee real estate brokers. But it would have taken a miracle for your home to sell under the listing circumstances you report.
Especially in today’s “buyer’s market” in most towns, since you are not selling a cheap house, you can well afford to pay a typical 5 percent to 6 percent sales commission to a full-service listing agent if you really want to get your home sold.
WILL MORTGAGE LENDER ENFORCE “DUE ON SALE CLAUSE?”
DEAR BOB: We want to give our house to our son and daughter-in-law as a wedding present. They have been extremely kind to us during some rough health situations. The house is worth around $600,000 and there is a $220,000 mortgage at 5.5 percent interest. They have agreed to take over the mortgage payments. However, the mortgage has a “due on sale clause.” Our attorney says the lender could call the mortgage due if the lender learns about the sale. Could they lose the house by foreclosure then? –Vance C.
DEAR VANCE: Don’t worry. There won’t be a foreclosure. If your son and daughter-in-law make the monthly mortgage payments on time, the chances are one in a 100 the lender would enforce the due-on-sale clause.
Even if that should happen, however, all the lender usually wants is (1) a mortgage assumption fee around 1 percent, plus (2) adjusting the interest rate to market level (around 6.5 percent today). In the rare event the lender insists the mortgage be paid in full, your son and daughter-in-law can easily refinance that mortgage, which is only about 35 percent loan-to-value ratio.
The new Robert Bruss special report, “Pros and Cons of Today’s Five Best Real Estate Opportunities,” 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
Real Estate Center).