DEAR BENNY: I purchased a townhome in January 2005 with a very low, interest-only loan, and have been paying approximately 20 percent extra towards the principal each month. My fiancée moved in about 15 months ago and has been paying $600 a month. The monthly interest-only payment is $1,600. Recently we decided to double the monthly payment in addition to paying an extra $10,000 towards the principle to lower the interest portion of the monthly payment. My fiancée has asked about taking advantage of the interest deduction on her tax returns. What is the best way (if any) for us to divide fairly the interest towards our yearly tax returns? I am thinking about giving her a quitclaim deed with her name on it in addition to mine. Is that a viable option? –Chuck
DEAR CHUCK: Even if your fiancée is put on title, since she is not named on the mortgage document (also called deed of trust), she will not be able to legally claim any deductions. According to the IRS, “to be deductible, the interest you pay must be on a loan secured by your main home or a second home.” The word “secured” means that the mortgage was recorded among the land records in the county where your house is located.
So, the only way that she will be able to claim any deductions is to put her name on title and refinance your existing loan. That may not be a bad idea, depending on whether your favorable interest-only loan will someday become an adjustable loan with much higher monthly mortgage payments. Too many people who obtained interest-only loans are now waking up to learn that their favorable loan will not last forever.
And while I do not want to get involved in your domestic situation, if you decide to put your fiancée on title before you get married, I strongly recommend that you enter into a form of “partnership agreement.” This agreement would include provisions on what to do with the property should you decide to break up, what happens if one of you is not able to pay his or her share of the house expenses, and how to divide the proceeds should you decide to sell the house.
DEAR BENNY: I put my home (paid for) into a limited liability company (LLC) on the advice of an attorney for asset protection. I have since been told by other lawyers that doing so provides no protection. How do I transfer it back into my name, and do I need an attorney to do so? –David
DEAR DAVID: I would be curious to learn why these other attorneys claim that the limited liability company does not provide you with protection. One of the primary reasons that LLCs became so popular in recent years is to provide protection.
Oversimplified, most state statutes authorizing the creation of an LLC specifically state that the member (or members) of that organization have no personal liability should there be claims against the LLC. In order to hold the member responsible, lawyers have to “pierce the corporate veil,” and that is not always easy.
If you keep separate books for the LLC, do not commingle your personal funds with those of the LLC, and always sign documents by adding the word “member” after your name; you should be personally protected.
One problem that does arise is when two or more properties are put into the same LLC. Both properties are now subject to any liability associated with either of the properties. My recommendation: If you own more than one investment property, put them into separate LLCs.
I suggest that you get another opinion from a real estate attorney. But if you do want to transfer the property back into your name, it would be a simple deed from the LLC to yourself. However, there may be steep recordation and transfer taxes imposed by your state, and there may also be tax consequences. You do need a tax advisor to guide you before taking any further action.
DEAR BENNY: I have a current 1-year-old mortgage with a balance of about $197,000 at 6.5 percent fixed for 30 years. I desperately need about $60,000 for repair/remodeling! Is it a good idea to refinance at 6.375 percent fixed for 30 years, or what else might you suggest? –Adrian
DEAR ADRIAN: You did not tell me if you have enough equity in your house to pull out another $60,000. If you do, then I would think it’s a no-brainer to refinance at the lower interest rate.
Your alternatives will most likely cost you more money. For example, if there is equity in your home, you can take out a home equity loan, but the interest rate will probably be higher. You may find some local or state government program that will lend you low-interest money if you are doing some environmentally sound improvements.
You may also be able to take out a straight bank loan, but if it is not secured (i.e., recorded among land records) you will not be able to deduct the interest you pay.
I suggest that you contact three or four mortgage lenders and see what they have to offer. My guess is that the refinance would make the most sense. However, you must also “do the numbers” to determine what closing (escrow) costs you will have to pay for that refinance. Homeowners do not always understand that a refinance — for all practical purposes — is treated as a brand-new loan, and you will have to pay all associated costs — such as appraisal, underwriting, loan preparation, lender’s title insurance, and settlement (or escrow) fees.
DEAR BENNY: I’ve a question that I hope you can answer: Who owns the strip of land between the sidewalk and the street? Can the residential property owner prevent you from letting your dog do his business on that strip of land (provided you comply with the ordinance to clean up after the dog)? –Robert
DEAR ROBERT: That’s a great question and I don’t have an answer. In my area (District of Columbia) that strip of land is owned by the city. You would have to check with your local authorities to confirm ownership. When you bought your house, you may have obtained a survey. If so, the survey will give you guidance on where your property lines are.
If the property in question is owned by the local government, my guess would be that the property owner cannot stop you from letting your dog “do his business.”
But putting legality aside, why do you want to do this if a neighbor objects? Put yourself in your neighbor’s shoes. Clearly, you would object if someone did that to you.
DEAR BENNY: My neighbors have a large, old tree that is just feet from my garage, and whose roots have caused the concrete floor of the garage to crack and become uneven.
Lately, however, it has gotten so bad that dirt is pushed up through the cracks and needs to be shoveled out every few months. The garage is almost to the point of being unusable and dangerous.
I want to ask the neighbors to remove the tree but I am certain that they will ignore my request. Do they have any legal responsibility for the damage their tree is causing? –Carrie
DEAR CARRIE: Tree law differs from state to state. In some states, the so-called “Massachusetts rule” applies, which basically means that your only remedy is to trim any overhanging branches and cut the tree roots on your side of the property line. Other states have adopted the “Hawaii rule,” which states “while it may be an inconvenience for the neighbor if the trees cast shade, or drop leaves, flowers or fruit, this is not actionable at law.” However, “when they cause actual harm or pose an imminent danger of actual harm to adjoining property,” the neighbor may require the tree owner to pay for the damage and cut back the endangering branches or roots. And if this is not done within a reasonable period of time, the neighbor “may cause the cutback to be done at the tree owner’s expense.”
The law is evolving. Recently, the Virginia Court of Appeals reviewed the issue, and adopted the Hawaii rule. Their reason was simple: We are no longer an agricultural society but an urban one, and the Hawaii rule is more suitable for today’s homeowners.
I would find out from your attorney what law applies in your case, but in any event, I would not hesitate to ask your neighbors to inspect the damage their tree is causing and request that it be removed.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.
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