DEAR BOB: I am four months late on my mortgage payments because of a job loss. Now I am in the process of foreclosure. What are my options? I am back working again but do not have all the money yet to catch up on my monthly payments. Any advice? –Jawanna P.
DEAR JAWANNA: Please don’t bury your head in the sand, as many borrowers who are in mortgage default do. Instead, contact your mortgage lender immediately by phone.
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Explain your situation very politely. Ask for a forbearance and a loan workout plan. That is presuming you can now afford to pay at least the regular monthly mortgage payment.
Ask that your unpaid mortgage payments, probably totaling several thousand dollars, be added to your mortgage principal. The result will extend your mortgage by several months but then your mortgage can be reinstated in good standing with the lender.
Lenders do not want to foreclose. They lose money on virtually every foreclosure. But lenders will insist their borrowers make the monthly payments on time.
If you are unable to resume the regular monthly payments, then ask the mortgage lender for time to sell your home to pay off the mortgage balance.
But do everything you can to avoid a foreclosure sale. Worse yet, filing bankruptcy will merely delay losing your home by foreclosure if you are unable to pay the monthly payments.
FAST FLIPPING RESULTS IN HIGH TAX RATE
DEAR BOB: I read an article on a Web site that says if you flip a property without holding title for 12 months or longer you will be taxed at 50 percent of profit. But holding longer, the tax is only 15 percent. True or false? –Puba H.
DEAR PUBA: Neither is fully correct. If you hold title to a fix-up “flipper property” or any asset less than 12 months, your sale profit will be taxed as ordinary income, just like your job salary, dividends and interest. The exact federal tax rate varies widely, depending on your income tax bracket, from a low of 10 percent up to a maximum of 35 percent, plus state tax.
However, if you hold a “flipper property” or any asset over 12 months, then your maximum federal long-term capital gain tax rate is 15 percent of your profit (plus applicable state tax). If you are in a low tax bracket, your long-term capital gain tax will be even lower than 15 percent. For full details, please consult your tax adviser.
DON’T RUSH TO SELL HOME AFTER SPOUSE’S DEATH
DEAR BOB: Do I need to sell my house before the one-year anniversary of my husband’s death in order to preserve that $500,000 home-sale tax exemption? My capital gain will be in excess of $250,000. –Gloria R.
DEAR GLORIA: Please don’t rush to sell your home. The anniversary date of your spouse’s death is irrelevant for tax purposes.
To qualify for the $500,000 principal-residence-sale tax exemption of Internal Revenue Code 121, presuming both spouses met the 24-out-of-last-60-months occupancy test, the principal residence must be sold within the same tax year as the spouse’s death.
The reason you don’t need to rush to sell your home is, presuming you inherited your late husband’s share of the residence, you will receive a new “stepped-up basis” as of the date of his death.
If the principal residence is in a common law state, you will receive a 50 percent stepped-up basis to market value as of the date of death. However, if the house is in a community property state, as the surviving spouse you will get a new 100 percent stepped-up basis so you will have little or no capital gain tax if you sell the home within a few years after your spouse’s death. For full details, please consult your tax adviser.
SHOULD HOME SELLER “START CLEAN” WITH NEW LISTING?
DEAR BOB: We had our house on the market for sale almost four months with no offers. All the houses in our price range have not sold in our upper-middle-class neighborhood. It shows well, according to the local Realtors. We are thinking of taking our house off the market for a short period and then re-listing it to “start clean.” How long should we keep it off the market? Should we use the same Realtor (she has been great, but won’t give us a straight answer on this.) –Jan L.
DEAR JAN: It used to be possible to “start clean” so your home would look to buyers and their agents like a new listing. However, most MLS (multiple listing service) computers can now report how many days a house has been on the market for sale within the last 12 months, both in its current and previous listings.
If you are satisfied with your Realtor’s services, then re-list with her, but never for longer than 90 days at a time. However, if she wouldn’t give you a straight answer, I suggest you interview at least three other successful local realty agents to ask them why, in their opinions, your home didn’t sell.
The obvious problem is your home might be overpriced. But some sellers are shocked to discover their listing agent is the obstacle. Perhaps she is uncooperative or disliked by many local agents. Maybe she makes your home difficult for other agents to show to their prospective buyers.
By interviewing other agents, you will get their CMA (comparative market analysis) forms to show your home’s current market value based on recent sales prices of comparable nearby homes, and the asking prices of similar neighborhood residences (your competition).
$25,000 IS MAXIMUM ANNUAL INVESTMENT PROPERTY LOSS
DEAR BOB: I am considering investing in rental property. Is each property considered an entity, eligible for the $25,000 annual tax loss deduction from ordinary income? Or is the loss limited to $25,000 for all of an investor’s properties? –Martin S.
DEAR MARTIN: Unless you or your spouse qualifies for unlimited annual investment property deductions as a “real estate professional” spending at least 750 hours per year on your real estate activities, you are limited to a $25,000 total annual loss deduction from all your investment properties against your ordinary taxable income.
However, unused losses (mostly from the noncash depreciation deduction for wear, tear and obsolescence) are “suspended” for use in future tax years, or when you sell a property you can use suspended losses to cut your taxable capital gain. For full details, please consult your tax adviser.
TWO $250,000 HOME-SALE EXEMPTIONS FOR SPOUSES LIVING APART
DEAR BOB: My husband and I have been profitably flipping houses for several years. We are planning on separating soon. I plan to live in my next fixer-upper house while making repairs. If we should both own and occupy separate principal residences for a minimum of 24 months within the next 60 months, and one or both of us decides to sell within that time frame, will we each qualify for up to $250,000 tax-free profits even if our divorce has not been finalized by then? –Sherry F.
DEAR SHERRY: If your husband lives in one principal residence for the required 24 of the last 60 months before its sale, and you live in another principal residence for the same required time, presuming that individual’s name is on the title to the home they are living in and selling, then each can qualify for up to $250,000 principal-residence-sale tax-free profits, thanks to Internal Revenue Code 121.
When your plans become definite, run them by your tax adviser to be certain each of you can qualify for $250,000 tax-free principal-residence-sale profits on two different houses.
BOUNDARY CHANGE IS NOT A DO-IT-YOURSELF PROJECT
DEAR BOB: I own an unusually shaped lot that juts in front of my neighbor’s house. I am willing to execute an equal land swap with him. What is the process to document this arrangement? Will this affect our title insurance? –Denis McG.
DEAR DENIS: This is not a do-it-yourself project. Please consult an experienced real estate attorney to guide the land swap through the bureaucratic maze, such as recording new parcel maps and insuring the new boundaries for each parcel.
NO MORTGAGE INTEREST DEDUCTION IF YOUR NAME IS NOT ON THE TITLE
DEAR BOB: I have paid all the property taxes on my mother-in-law’s house for the last six years. She died in 2005. Can I deduct her 2006 property taxes I paid on my 2006 income tax returns? My husband and his sister are the sole heirs. The house is up for sale. I am not sure if probate is completed yet. –Ellen H.
DEAR ELLEN: If your name is not on the title to the property, you have no legal obligation to pay the property taxes. Therefore, you are not entitled to any tax deduction for being a good daughter-in-law and volunteering to pay the property taxes.
It sounds like the title is still in the estate so even your husband, as an heir, wouldn’t yet be entitled to the property tax deduction. For full details, please consult your tax adviser.
The new Robert Bruss special report, “2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” 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.
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