DEAR BENNY: I hope you enjoy a good discussion as much as I do, as I’m going to try to convince you that a reverse mortgage is more than a last resort. Let’s look at a 70-year-old who has been very comfortable in his retirement, collecting Social Security and withdrawing 4 percent from his $500,000 portfolio.

Unfortunately, his portfolio has lost 40 percent of its value, is now worth $300,000, and in order to maintain his income he now has to withdraw 7 percent. We both know that by withdrawing 7 percent that $300,000 will go fast. Why not enter into a reverse mortgage, leave the portfolio alone so it can have a chance to recover, and use the equity in the home (tax-free dollars) to make up the income from the portfolio? When the portfolio has recovered a bit, stop using the equity and return to the portfolio, keeping in mind the equity not used in the reverse mortgage is in a growing line of credit that is available at anytime for any reason. –Stephen

DEAR BENNY: I hope you enjoy a good discussion as much as I do, as I’m going to try to convince you that a reverse mortgage is more than a last resort. Let’s look at a 70-year-old who has been very comfortable in his retirement, collecting Social Security and withdrawing 4 percent from his $500,000 portfolio.

Unfortunately, his portfolio has lost 40 percent of its value, is now worth $300,000, and in order to maintain his income he now has to withdraw 7 percent. We both know that by withdrawing 7 percent that $300,000 will go fast. Why not enter into a reverse mortgage, leave the portfolio alone so it can have a chance to recover, and use the equity in the home (tax-free dollars) to make up the income from the portfolio?

When the portfolio has recovered a bit, stop using the equity and return to the portfolio, keeping in mind the equity not used in the reverse mortgage is in a growing line of credit that is available at anytime for any reason. –Stephen

DEAR STEPHEN: I always enjoy a good discussion — and even a good argument. After all, I am an attorney by profession. You raise a good point, but I still believe that a reverse mortgage should be considered only as a last resort. Perhaps, in your example, it is a last resort for that gentleman who lost a lot of his retirement income.

Quite recently, John Dugan, U.S. Comptroller of the Currency, warned that "the ability of consumers to access their home equity through immediate and large-sum payments can pose substantial risks."

What are these risks? Misleading and deceptive marketing is one. Another is that some reverse mortgage borrowers have not kept current on their insurance and real estate taxes, thus leading to more foreclosures.

And, perhaps most significant, the upfront fees and charges are very high and in your example our gentleman would be losing a lot of his equity just on those costs alone.

And now a word of caution for anyone considering a reverse mortgage: Make sure you fully understand all of the terms and conditions, and don’t be persuaded to buy insurance or other annuities with the moneys you receive through this type of loan.

DEAR BENNY: I bought my condo 11 years ago. This was the first home I ever owned. Do I pay taxes on the sale? I am not counting on paying any taxes; does anyone have this information? –Peterson

DEAR PETERSON: You bought real estate and plan to sell it now. Accordingly, you may have to pay capital gains tax. You have to take your original purchase price, and add such items as improvements and any closing costs you paid when you bought the unit. This is known as the adjusted basis for tax purposes.

You then have to determine the adjusted selling price. You compute this by taking the sales price, less commissions and any closing costs. Subtract the adjusted basis from the selling price to determine your gain.

If you have lived and owned the property for two out of the five years before it is sold, you can exclude up to $250,000 of this gain. If you are married and file a joint tax return with your wife, the exclusion increases to up to $500,000.

This is quite simplified, but you should consult a tax adviser to assist you with your specifics.

DEAR BENNY: I thought this might be an interesting possibility to address in your column. Our primary residence has a $245,000, 15-year first mortgage with 12 years remaining at a fixed rate of 5.75 percent and monthly payments of approximately $2,500. We have been in the home for 23 years and have a HELOC of $425,000 available. Even in today’s market the home is worth over $1 million.

We can use the line of credit to pay off our first mortgage and obtain a fixed rate of 4.1 percent, cost free, amortized over 20 years. Our plan is to add $1,000 a month as principal reduction to the required $1,500 loan payment, thus paying the same as before and paying off the loan in 12 years. …CONTINUED

Is there anything wrong with this plan? We would still have over $100,000 remaining in the HELOC for emergencies as well as personal savings. –Herb

DEAR HERB: That’s an interesting approach, but I see one potential hitch. Where can you get a fixed-rate loan at 4.1 percent cost-free? Have you been given a loan commitment for such a loan? Do you need tax deductions? If so, why not just keep your two loans? The way I read your question, you really are not saving anything: Either way, you will pay off the loans in 12 years, but not get the same tax deductions.

And even if you can’t take advantage of the deductions for the mortgage interest, I cannot see any real benefit to your plan. You have a decent first trust, so my inclination is to keep the status quo.

DEAR BENNY: We purchased a home in the Colorado mountains. Because we were in Indiana selling our other home, our real estate agent did the final walkthrough the day before closing. She found everything to be in order.

When we moved in, the refrigerator/freezer was missing from the kitchen. The (Multiple Listing Service) sheet stated that it was included in the purchase price. Our Realtor discussed this with the seller’s Realtor who said it was not part of the purchase because we never stated in writing (on the legal contract) that we wanted it to stay. We didn’t know that we had to since it was on the MLS sheet, and our agent said she had never encountered that before. During the walkthrough the day before closing it was still there, even though all furniture and personal items had already been moved.

Do we have any legal avenues? We had to quickly purchase a new refrigerator/freezer at mountain prices when we feel we already purchased the original one. We think we were scammed. –Barbara

DEAR BARBARA: Many years ago, I had two clients. One was selling their house in California and moving to Maryland, and the other was selling their Washington, D.C., house and moving to Oregon. We all learned the hard way that local customs and practices are quite different. As I understand it (at least then), out West, refrigerators normally do not convey (i.e. stay with the house) unless specifically spelled out in the contract.

In my area of the country (Eastern U.S.), refrigerators convey with the house unless they are specifically excluded from the contract.

The typical real estate contract generally contains language that only what is written in the contract is binding on all parties, and that no other representations — oral or written — are binding. Accordingly, it is possible that you are legallyunable to rely on the MLS statement unless it is specifically incorporated by reference into the sales contract.

Perhaps your real estate agent should have advised you of this local custom, since she knew that you were not from her area.

Suggestions for readers who plan to enter into a sales contract: Incorporate all written documents (such as the MLS or promotional material) into the contract. If you want a particular item, such as a ladder or fancy chandelier, write that into the contract.

If you are unsure whether an item is a fixture, which normally does convey, ask the agent or consult an attorney. I once had a buyer client who was upset that the built-in bookcase was removed by the seller; we took the position that since it was affixed to the wall it was a fixture, and the seller capitulated and returned the item.

DEAR BENNY: This is a 1031 (Starker) question. If you originally bought the property as a rental property and then traded up for another rental property and now wish to move into to it, how many years do you have to live in it to qualify for the $500,000 exclusion? I have been told that if the original property was purchased as a rental then the owner needs to live in the property for five years. –Howard

DEAR HOWARD: That is partially correct. As a result of the American Jobs Creation Act of 2004, you may exclude gain (up to $500,000 for married couples filing a joint tax return or up to $250,000 if you file a single return) only if (1) you meet the ownership and use tests and (2) you have owned the replacement property for a period of five full years ending on the date of the sale or exchange.

In other words, you only have to live in the property for two out of the five years before sale, but you must own the property for five years.

For additional information, go to the Internal Revenue Service Web site (www.irs.gov) and get a copy of Publication 523, entitled "Selling Your Home." For more detailed information, get a copy of IRS Revenue Procedure 2005-14.

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 benny@inman.com.

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