DEAR BENNY: In January I lent my daughter $20,000 so she could use it as a down payment on her condominium unit. She gave me a promissory note. I took the money out of my retirement account (I am retired). My tax person said this will be added to my yearly income and I have to claim it as my income. I have a friend who works as a loan officer at a bank; she said I just have to claim the interest. Who is right? –Linda
DEAR LINDA: From the facts that you have given me, I believe that your tax person is correct. If you withdraw money from your retirement account, normally that is taxable income to you. The theory of retirement plans is that you are able to exclude from your annual income moneys that you put into these accounts (such as a 401(k), and let it grow tax free while you are still working. But when you start withdrawing (and there is mandatory withdrawal when you reach age 70 1/2) this money is ordinary income to you and you have to pay income tax on that money.
You should also discuss this with the trustee of your pension plan. Perhaps the moneys can be considered a loan from that plan in which case it might not be considered a "taxable withdrawal." I am not an expert on pension plans so you should investigate this further.
In any event, the interest that your daughter will be paying you is ordinary income, which must be reported to the IRS on a yearly basis. Unfortunately, unless your daughter also gave you a deed of trust (mortgage), and has it recorded among the land records in the jurisdiction where the property is located, she cannot deduct that interest from her tax returns.
So unless her lender objects, you should consider having your daughter give you a deed of trust for $20,000 and have that document recorded. This way, she can deduct the mortgage interest.
DEAR BENNY: I am the owner of a condominium unit in a three-unit building. The other owners and I manage the association ourselves. One of the owners has not been paying her association dues for over a year now. She claims that she has used much of her time to maintain the building and should be compensated appropriately, even though none of her work has been authorized by the association. When the third owner and I ask her for an itemization of the work she has done, she constantly gives excuses for not providing this information. I have suggested meeting with a mediation group to try to work this out, but, not surprisingly, she has not responded. What should be our next step? –John
DEAR JOHN: Read your legal documents, especially the bylaws of your association. I am quite sure that they state that owners cannot be compensated for work that they may do in the building.
I am also quite sure that your bylaws spell out the procedures for handling collection of delinquent assessments. All of the bylaws I have ever reviewed always provide that if an association has to file suit for collection, the delinquent owner can be assessed legal fees for this action.
So, I recommend that you and the third owner immediately retain a local attorney and instruct him or her to file suit against the owner. Make sure that either you or your lawyer reviews the legal documents to be certain that mediation or arbitration is not required first before a lawsuit is filed.
No condominium unit owner should be allowed to be delinquent for more than two to three months, and certainly not for one year.
DEAR BENNY: You have often written that most homeowners should keep their mortgage. Would you still say there is no benefit to paying off the mortgage if by doing so you were then able to put that monthly mortgage payment instead toward pre-tax retirement savings such as a 401(k) and 403(b) of $20,500/year? This not only gives retirement security — it reduces adjusted gross income so there is more tax savings. This is why we are about to pay off our mortgage. We owe $100K on a house worth $400K. We have a monthly payment of $1,700 on a 15-year note at 4.5 percent interest. It has about 11 years left. Do you agree with our plan? –Meg
DEAR MEG: My opinion about paying off one’s mortgage is only a general statement. Obviously, everyone’s situation is different, and you have to analyze your own circumstances and do the numbers.
However, in general, unless you have a high-interest-rate mortgage, I still believe that you are better off keeping that loan on the books. Your rate is very low. If you have to pay taxes, you are getting some benefits by taking the deductions on the interest that you pay. Can you get a good rate of interest today in your pension plans, and one that is secure and will not fluctuate dramatically as the stock market is doing today?
I often say, "Do the numbers, and talk with your financial advisors." That’s the only way to determine if you should hang on to that low-rate mortgage.
One suggestion: You can add a little more money to your monthly payments so that you can reduce the 11 years down and ultimately pay off the mortgage faster.
DEAR BENNY: I live in Florida and own two adjoining lots. It is a gated, deeded community. One lot contains our home and the other is undeveloped. I would like to know what would be needed to join the two lots and make one parcel. We are considering enlarging our home. –John
DEAR JOHN: You will have to consult with a local attorney in your area to determine what requirements are needed to merge the two lots.
But first, you have to make sure that this does not violate the legal requirements in your homeowners association. I suggest that you talk with the president (or the attorney) of your association to make sure that you have the legal right to combine the two lots.
You may also want to consider whether this makes sense in the long run. If you combine the lots and enlarge your house, will it be the biggest property in the neighborhood? Often, the largest house on the block does not necessarily sell for the highest price. Equally important, some day you may need money — and your vacant lot is a valuable asset to assist you in raising funds. If you combine them now, down the road you may have to undo this, which will cost you time and money.
Give serious thought to all these issues before you make the final decision.
DEAR BENNY: A friend of mine moved into an apartment and lived there for about 18 months when she was informed the building was going condo. She was told she did not have to clean her apartment since it would be gutted for the condo conversion, nor did she have to give 30 days’ notice. She found a place immediately and moved. She then received a letter from the owners saying they were keeping her $1,600 deposit and demanding another $300 (which she ended up paying) because she did not give 30 days’ notice. She now plans to take the owner to small claims court for $1,900, which she feels they owe her. Does she have a case? –A.J.
DEAR A.J.: Yes, it sounds like she has a good case, but it’s all a matter of proof. What evidence does she have that her landlord told her that she did not have to clean up her apartment and did not have to provide any advance notice? If she does not have this in writing, it is going to be her word against the landlord — and as we all know, people have been known to lie in court, even under oath.
A good lesson can be learned here: Get everything in writing. In your friend’s case, she should have sent the landlord a letter (or an e-mail) merely confirming these promises. If the landlord did not respond in the negative, that should be satisfactory evidence to a judge.
DEAR BENNY: I married my college sweetheart two years ago. My house is paid for and I would like to put her name on the title. My problem is that she filed bankruptcy three years ago and everything was dismissed. Would it be safe to add her name or should I see a real estate attorney? –Robert
DEAR ROBERT: You should consult a real estate attorney in your area, but if your wife’s bankruptcy has now been discharged, I see no problem if you add her to the title to your property.
Bankruptcy deals with issues and credit problems that occur before you file for bankruptcy protection. The theory behind bankruptcy is to give you a fresh start once you file, so I definitely recommend that you add her to your title.
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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