DEAR BENNY: Your recent column raised the question of making one extra payment a year as compared to spreading it out over 12 months. The critical factor is whether the extra payment is made at the beginning of the year. At the beginning, it advances the amortization schedule very differently than at the end of the year. –Stanley

DEAR STANLEY: Thanks for writing. You are correct. However, many homeowners cannot afford to make a large, lump sum payment either at the beginning or at the end of the calendar year. That’s why I suggest making extra payments each and every month, in an amount that is at least 1/12th of your actual monthly payment. This way, you reduce the principal balance each month, and thus the interest calculation for the next month will be lower.

DEAR BENNY: Your recent column raised the question of making one extra payment a year as compared to spreading it out over 12 months. The critical factor is whether the extra payment is made at the beginning of the year. At the beginning, it advances the amortization schedule very differently than at the end of the year. –Stanley

DEAR STANLEY: Thanks for writing. You are correct. However, many homeowners cannot afford to make a large, lump sum payment either at the beginning or at the end of the calendar year. That’s why I suggest making extra payments each and every month, in an amount that is at least 1/12th of your actual monthly payment. This way, you reduce the principal balance each month, and thus the interest calculation for the next month will be lower.

But, if you do decide to make additional principal payments, make sure that your check (and any coupon that you send to the lender) specifically references this extra payment, and provide the exact amount.

DEAR BENNY: I am a widow with a very small estate and would like to avoid probate for my children. I own my own mobile home but not the property it sits on. If I added my son’s name to the title, would that avoid my home having to go through probate? –Audrey

DEAR AUDREY: I don’t know what state you live in, so I can give you only general advice. In some states, a mobile home is not considered real estate, but personal property, so mobile-home owners should consult their local attorney to determine their specific status.

When you die, your mobile home will be an asset of your estate and may have to be probated in order to have it legally transferred to your son.

You can add his name to title, but that would be considered a gift, and there may be tax implications involved. You have to discuss your own situation with a financial adviser.

And depending on how title will be held, probate may be necessary. If you and your son will own the property jointly (usually called joint tenants with rights of survivorship), probate will not be needed; on your death, the property will automatically go (by operation of law) to your son.

But there is a more major problem, namely whether it makes sense to transfer now or let your son inherit the home on your death. Let’s say you bought the property for $20,000 and it is now worth $50,000.

Your basis for tax purposes is $20,000. If you give half of the property to your son, your basis will be $10,000 and your son’s basis will be the same. Under law, the receiver of a gift takes on the same basis as the giver of the gift.

Prior to 2010, we used to have the stepped-up basis. That meant that on your death, your son’s basis would be the value of the property at the time of your death, which, in our example, would be $50,000. So if he sells it for $50,000, he will not have to pay any capital gains tax. On the other hand, if his basis is low (because of the gift), there will be a tax to pay.

This year (2010) there is no stepped-up basis. So if you die this year, your son’s basis in the property will be the lower of your tax basis or the fair market value. However, he can increase that basis by up to $1.3 million dollars (an extra $3 million can be added to assets that go to a surviving spouse).

So, unless your mobile home is up in the million-dollar range, the fact that the stepped-up basis does not exist this year is irrelevant. On your death, your son’s basis will be increased.

This is complicated and a financial adviser can assist you in making your decision.

In simple terms: If you give him a gift of half of the property now, he may have to pay capital gains tax if and when the property is sold. On the other hand, if he inherits the property, he will have to probate your estate, but may not have to pay the tax.

Of course, if he plans to live in the home for two years out of five before it is sold, he will be able to take advantage of the up to $250,000 exemption of gain (or if he is married and files a joint tax return, the exemption is up to $500,000).

I don’t know how your probate court works nor do I know the costs. However, you have to "do the numbers" before making that decision.

DEAR BENNY: I have been notified by our city that our family home must be licensed as a business and inspected at considerable cost to me. Never did I consider it a rental or a business.

I moved to my present house in 1992 to have larger quarters to accommodate my aging mother for eight years until her death. The smaller home (the one the city considers a rental) has been occupied for 18 years by my son who pays the upkeep, utilities, tax and insurance at no profit to me. Never has it been advertised as a rental. It’s just our family home. In your opinion do I qualify for an exemption? –Shirley

DEAR SHIRLEY: I don’t know in which state your property is located, nor do I know the licensing requirements in your community. Accordingly, I can provide you only general advice.

From what you have told me, it does not appear that your home is a business. I would immediately contact a supervisor in the agency that sent you the notice, and meet with him/her. Take pictures of your property, show them the utility and other bills that your son pays, and even get an affidavit from your son that he does not pay any rent — just upkeep and maintenance.

If the city still persists on pursuing this matter, I would appeal to a higher level. I would also talk with your local elected city representative and see what he/she can do. After all, our elected representatives are supposed to be responsive to those who elected them to office.

In the final analysis, you may have to pay the license fee and file a suit to enjoin the city from pursuing this further. But that’s expensive and requires legal assistance.

DEAR BENNY: In a previous column, you talked about canceled debt in regards to a short sale. My question is: Does the bank have to agree on the short sale and cancel both the principal and second mortgage?

Example: If the fair market value (FMV) of my home now is $176,000 and my initial home mortgage was $219,000 plus an additional second mortgage of $30,000 (used for improvements on the home), then $73,000 is canceled debt only if the bank agrees? And if the bank agrees then I don’t have to pay any income tax on the debt, correct? If the bank does not agree on a short sale, then am I out of luck? –Jerry

DEAR JERRY: Banks are banks; they don’t have to do anything they don’t want to do. No, the bank does not have to agree on the short sale, regardless of how attractive it may be to the bank.

I often question why a bank would foreclose on a property, and keep it in its inventory (called "real estate owned," or REO), rather than allow it to be sold for a price lower than the mortgage amount. When the bank owns the property, it has to pay the real estate tax, insurance and maintenance. If and when the bank decides to sell, it will retain the services of a real estate agent, and that will cost them a commission.

But, as I said, "Banks are banks."

It appears from your question that the same bank holds both the first and the second trust (mortgage). That makes it a lot easier to cancel both loans. It is much more difficult to get a short sale approved when the first and the second are held by different lenders. The first takes the position that if the second does not agree to reduce (or cancel) its loan, the first will foreclose, which will wipe out the second trust holder. On the other hand, the second says, why should you (first holder) get all the money without me getting some of it?

As to whether you have to pay any income tax on the canceled debt, that really depends on the circumstances. If this is your principal residence, then no income tax will be owed. For more information, go to www.irs.gov, click on publications and download Publication 4681, entitled "Canceled Debts, Foreclosures, Repossessions and Abandonments."

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