DEAR BOB: My husband has a terminal illness. I wonder how long I have after he passes away to take advantage of his $250,000 principal-residence-sale tax exemption. We have owned our home for 30 years and have no mortgage but a lot of equity, thanks to market-value appreciation. I want to stay in the home for a while, but I don’t want to miss out on his exemption. –Geri D.
DEAR GERI: Please don’t rush to sell your home after your husband passes on. Making quick decisions after the death of a loved one is often a major mistake.
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If you sell your home in the tax year of your husband’s death, you can still use the $500,000 principal-residence-sale tax exemption for a married couple, thanks to Internal Revenue Code 121. That’s presuming you both met the 24-out-of-last-60-month occupancy requirement and title is held in at least one spouse’s name.
You should be aware that if he leaves his half of the house to you, as I presume he will, you then receive a new stepped-up basis on your inheritance. In a common-law state, this would be a 50 percent stepped-up basis. But in community-property states with the names of both spouses on the title, then a new 100 percent stepped-up basis to market value on the date of death applies.
Thanks to the generous stepped-up-basis tax rules, you can see why there is no need to hurry to sell the home in the year of your husband’s death. For full details, please consult your tax adviser.
WHAT IS A SHORT SALE?
DEAR BOB: What is meant by the real estate term “short sale”? –Rich F.
DEAR RICH: A short sale means the mortgage is in default and the lender agrees to accept a sales price below the amount that is owed on the mortgage as payment in full.
This situation usually occurs when a home has declined in market value or the home was overfinanced for more than it is worth. For example, suppose a mortgage in default has a $200,000 balance, but the fair market value of the house is only $180,000. If the lender agrees in advance to accept a $180,000 short sale as full payment, then the title can be delivered to a buyer who agrees to pay $180,000.
However, the defaulting borrower will have $20,000 of taxable debt relief income, as shown on the lender’s IRS 1099 form sent to the borrower and the IRS. Lenders who agree to short sales insist that borrowers not receive any cash from a short sale. For more details, please consult the mortgage lender.
BIG DRAWBACK OF HOME EQUITY LOANS FOR SENIOR CITIZENS
DEAR BOB: How can you recommend a reverse mortgage instead of a home equity line of credit for a senior citizen homeowner? As a loan officer, I am often frustrated with your advice. I run my lines of credit for my clients at almost zero commission to myself. With fees of only about $175 including the appraisal, there isn’t room for much commission. Reverse mortgages should be outlawed. I will never do that type of mortgage for my clients. Reverse mortgages require mortgage insurance. The commissions I’ve seen are about four points. I am appalled. Seniors who have equity in their homes should do a cash-out refinance and have a financial advisor manage their money. This is the most cost-effective loan. And they get to keep their house. –Jamie B.
DEAR JAMIE: I am shocked a loan officer like you doesn’t fully understand reverse-mortgage benefits. If a senior citizen has little or no income, how can they afford the payments on a home equity loan or a refinanced mortgage?
I suggest you fully study the benefits of reverse mortgages before you close your mind. Refinancing a mortgage and turning the proceeds over to a financial advisor makes no sense (except for you, who will receive a loan origination fee). How will the senior citizen homeowner make the mortgage payments?
Senior citizen reverse mortgages require no monthly payments. Yes, the up-front fees can be stiff. For that reason, a reverse mortgage should not be obtained unless the senior plans to stay in the home at least five years. All reverse mortgage lenders now require counseling so the borrower fully understands the details.
How else can senior homeowners obtain the money they need from their home equity without having to make monthly payments? Contrary to your mistaken remark, the senior citizen with a reverse mortgage keeps his/her home.
The reverse mortgage is repaid when the homeowner sells, moves out or dies. 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.
POWER-OF-ATTORNEY FORM DOESN’T ALWAYS WORK
DEAR BOB: About five years ago, when my 83-year-old dad started “declining,” his attorney suggested his giving me a power of attorney. The form was witnessed and notarized. He has now been living in an assisted-living facility for six months and there is no chance he will ever return to his house. So I put it on the market and sold it. However, the title insurance company refuses to honor my power-of-attorney form. The title officer says she must verify my father really wants to sell his house and is not a victim of elder abuse. Since dad often doesn’t even recognize me when I come to visit him, there is no way he can understand I need to sell his house to pay for his care in an upscale assisted-living facility. Meanwhile, the house buyer backed out. What should I do? –Harlan R.
DEAR HARLAN: Talk to an attorney about having a conservator appointed to represent your father’s best interests. Unfortunately, title insurance companies have seen too much elder abuse and they have to be cautious about accepting a power of attorney.
There are many valid uses for a power-of-attorney form, such as when a person is unable to attend the closing settlement for a home sale.
Every time I’ve seen a power of attorney used for a home sale, the title officer always phones the individual to be certain (a) he or she is alive, (b) understands the transaction, and (c) has authorized the attorney-in-fact to sign the documents.
CORRECT TITLE FOR “FLIPPING” BOOK
DEAR BOB: Some time ago you recommended a book “Flipping Properties for Dummies” by Ralph Roberts. I have searched Amazon.com and my local bookstore but the only book they can find is “Flipping Houses for Dummies” by Ralph Roberts. Is this the correct title? –Mic D.
DEAR MIC: Yes. The correct title is “Flipping Houses for Dummies” by Ralph Roberts. It is an excellent book, which I highly recommend.
HOW TO HANDLE HOME TRANSFER TAXES AND RECORDING FEES
DEAR BOB: My wife and I purchased a renovated condominium last April. The settlement terms include our paying a city transfer tax and recording fees. We weren’t too pleased about that, but decided to proceed with the purchase and are very happy. Are these expenses tax deductible like property taxes? –Bahram R.
DEAR BAHRAM: No. Transfer taxes and recording fees, whether paid by the buyer or seller, are not tax-deductible.
As the buyer, you should add these costs to your purchase price adjusted cost basis for your condo. The result will be reduction of your capital gain when you eventually sell the condo.
If the seller had paid those costs, the seller could subtract them as sales expenses, similar to the realty sales commission, from the gross sales price, thus reducing the seller’s taxable profit. For full details, please consult your tax adviser.
SOMETHING IS SERIOUSLY WRONG IF HOUSE HASN’T SOLD IN A YEAR
DEAR BOB: I have a house I have been trying to sell for almost a year. It’s not selling. What should I do? I am alone and running out of money. –Wanda R.
DEAR WANDA: The most frequent reason a home doesn’t sell is it’s overpriced. Or perhaps it is not being effectively marketed. If your house is not listed with your area’s most successful real estate agent, you are making a big mistake.
When a house has been listed with a realty agent for a year and it is still unsold, that one-year listing was obviously far too long. A maximum 90-day listing term is suggested instead to keep the listing agent working hard to get the house sold in 90 days.
Before listing with a realty agent, please interview at least three successful local agents. Each agent interviewed should prepare a written CMA (comparative market analysis). This form shows recent sales prices of similar nearby homes, asking prices of neighborhood homes like yours (your competition), and asking prices of recently expired comparable listings.
The CMA also shows each agent’s opinion of your home’s market value. Ask each agent you interview why, in their opinion, your home hasn’t sold. Then, after checking each agent’s references of recent sellers, list your home for 90 days with the best agent for your situation.
The new Robert Bruss special report, “2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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