News
12-29-2006, 06:05 PM
Split the Mortgage, Get Tax Benefits?
By Robert J. Bruss
Q: DEAR BOB: I sold my principal residence in January with a capital gain of about $400,000. The same day, I bought another house using the profit as a down payment. I was single until April. Mine was the only name on the title to the house that was sold. But my partner (now wife) and I had been splitting the mortgage payments for more than 24 months. It was our primary residence for more than two years before the sale. Can we file jointly and receive a $500,000 capital gains tax deduction?
-- Tim C.
A: DEAR TIM: You can file a joint tax return because you are now married. But that won't help you increase your Internal Revenue Code 121 principal-residence-sale tax exemption above $250,000. The fact that you bought another house is irrelevant.
You are entitled to a $250,000 home-sale tax exemption under IRC 121 because you owned and occupied your principal residence for more than 24 months during the last 60 months before its sale.
However, your girlfriend who also occupied the primary residence cannot qualify for a $250,000 exemption, although she paid half of the mortgage payments, because she was not married to you at the time and her name was not on the title.
Nor is she entitled to any tax deduction for the half of the mortgage interest she paid. The reason is that she had no legal obligation to make those payments.
If her name had been on the title, she would have been legally obligated and entitled to a tax deduction for the share of mortgage interest she paid. It's unfortunate, but you and she did everything wrong. You owe capital gains tax on the $150,000 exceeding your $250,000 exemption.
DEAR BOB: I saw that recent item in your column about the abnormally low appraisal on a condominium refinance. As I recall, the lender's appraiser estimated a market value $157,000 below the value calculated by a second appraiser who was hired by the condo owner. I had a similar bad appraisal experience with a major nationwide lender. Because I have a 745 FICO credit score and good income, my qualifications for the refinanced 75 percent loan-to-value mortgage were not an issue. The appraiser hired by the lender told me, point-blank, that she was expected to appraise at least 10 percent below market value. I was shocked by her low appraised value of my home, despite three comparable nearby sales within the last four months for at least $35,000 more each. I demanded a reappraisal. The lender refused. So I refused to pay the appraiser her $450 fee for the dishonest appraisal. I then refinanced with another lender who used an honest appraiser. Are lenders now requiring low-ball appraisals on mortgage refinances?
-- Helene W.
DEAR HELENE: Based on your experience and those of other readers who responded, it appears some mortgage lenders have become ultra-cautious about appraisals for mortgage refinances.
Although it is against appraisal rules for a lender to instruct appraisers to "hit the number" or to "lowball" appraisals, it appears that is happening. If enough borrowers like you refuse to accept low appraisals, lenders will stop their illegal tactics.
DEAR BOB: In a recent article, you correctly said Internal Revenue Code 1031 tax-deferred exchanges must involve a trade equal or more in both price and equity. But you mistakenly went on to say that the replacement property must be a "like-kind" property. The current rule allows an exchange of any property held for investment purposes. Thus, an apartment building can be traded for bare land, etc. Please make this correction for the benefit of your readers and my clients, as I am a real estate agent -- Jim S.
DEAR JIM: You should be aware that the tax term "like kind" does not mean "same kind" of property when referring to IRC 1031 tax-deferred exchanges.
"Like kind" means the qualified property must be held for investment or use in a trade or business. Almost every property can qualify except a personal residence or dealer property, such as a home builder's inventory of houses.
To illustrate, an investor can make a "like-kind" trade of a rental house for a warehouse, or an apartment building owner can make an IRC 1031 "like-kind" tax-deferred exchange for a shopping center, as long as the trade is equal or more in price and equity without any cash "boot," which is taxable "unlike-kind" property.
DEAR BOB: I am in the process of refinancing my mortgage. What fees are unnecessary junk fees? -- Darrin B.
DEAR DARRIN: The definition of a mortgage lender's unnecessary junk fee is any charge that is not for a specific service. Examples of legitimate lender fees include the appraisal fee paid to the appraiser, title insurance paid to the title insurer, and the credit report fee paid to a credit bureau.
But a junk fee is nonspecific, often for vague services that do not benefit the borrower. Unnecessary junk fees may have creative names, such as administrative, documentation, warehouse, underwriting or loan review fee. Those services should be included in the mortgage interest rate.
DEAR BOB: I don't understand the "60 months" part of Internal Revenue Code 121 for home sales. Can I own my home for 24 months, live in it as my primary residence and qualify for the $250,000 sale exemption? Or must I own the home for 60 months and live in it for 24 of those 60 months? -- John C.
DEAR JOHN: Unless you acquired your principal residence in an Internal Revenue Code 1031 tax-deferred exchange, you do not have to own it for 60 months before qualifying for the IRC 121 principal-residence-sale exemption of up to $250,000 ($500,000 for a qualified married couple filing a joint tax return).
At a minimum, to qualify for the capital gains tax exemption, you must have owned and occupied your principal residence for at least 24 months before its sale. That means you could have purchased it as recently as 24 months before its sale if you occupied it as your primary residence for that time.
DEAR BOB: My late mother and I owned a house together as tenants in common. Her written will left everything to me, her only offspring. When I went to see a local probate lawyer, she said it would take at least six months and cost me about 5 percent of my mother's modest estate to transfer everything to me. Is this true? -- Sophie R.
DEAR SOPHIE: Unless your late mother's estate qualifies for an exception to the probate requirements in the state where she was a resident, the probate lawyer is probably correct that the estate is subject to jurisdiction of the local probate court.
The only easy title transfers without probate after a property owner dies are if the title was held in joint tenancy with right of survivorship or in a revocable living trust. Then probate court jurisdiction does not apply.
As for the probate lawyer's fee of 5 percent of the gross estate, each state has a maximum statutory fee depending on the estate's total value. However, that fee can be negotiated downward.
If the lawyer thinks you will take your business elsewhere, she is very likely to reduce her fee substantially unless there are complications, such as a contested will.
DEAR BOB: My father died this year. He left behind six adult children. I don't think he liked me very much. So he left me his worst property, out of the 26 he owned at the time of his death. It is a vacant, vandalized slum property that was once a nice house. I checked with five nearby real estate agents, and they all agree it will be very difficult or impossible to sell without extensive fix-up. They said even "vulture buyers" don't want it. There is about $7,500 of unpaid property taxes. Otherwise, it is free and clear. I don't want to fix it up, nor do I need the money from selling the property. How can I avoid getting involved? -- Wally C.
DEAR WALLY: You can renounce your inheritance of that property by notifying the estate executor or court-appointed administrator in writing. After you renounce inheritance, it will pass to another heir according to the terms of the will.
Be sure to do this promptly, before the probate court distributes the property to you according to the will. After title transfers to you, then you become the owner, and getting rid of the property could be difficult.
DEAR BOB: Our house has been listed for sale for more than five months. The local market is very slow now. The listing agent has the house on her Web site and occasionally holds a weekend open house. What can we do? We need to get our house sold before we can buy another home near my husband's new job site. -- Kendra S.
DEAR KENDRA: The primary reason a house doesn't sell is that it is overpriced. If your home has been listed for sale for more than five months, something is seriously wrong.
Ask the listing agent to prepare a new comparative market analysis. This form shows recent sales prices of similar nearby homes, the asking prices of neighborhood homes (your competition) and the asking prices of recently expired, comparable listings (usually overpriced).
The analysis should also show your listing agent's recommended asking price. If your home is overpriced, it's time to face reality and reduce the price.
Equally important, be certain your home is correctly listed in the local multiple listing service and on the local MLS Web site, the listing agent's most powerful marketing tool. Also, check your home's listing at http://www.realtor.com/, where most buyers begin their searches.
In addition, ask the listing agent to explain what she has done and is doing to properly market your home in a slow market. How often does she advertise your home in the newspapers and in local home sales magazines? She should be holding a well-advertised open house at least once a month.
In addition, she should network among the MLS member agents who sell homes like yours, to be certain they are aware of your home. Lastly, ask the listing agent whether she recommends "staging" your home to show it at its best, such as by removing old-fashioned furniture and sprucing up the interior to make it appear more attractive.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.
By Robert J. Bruss
Q: DEAR BOB: I sold my principal residence in January with a capital gain of about $400,000. The same day, I bought another house using the profit as a down payment. I was single until April. Mine was the only name on the title to the house that was sold. But my partner (now wife) and I had been splitting the mortgage payments for more than 24 months. It was our primary residence for more than two years before the sale. Can we file jointly and receive a $500,000 capital gains tax deduction?
-- Tim C.
A: DEAR TIM: You can file a joint tax return because you are now married. But that won't help you increase your Internal Revenue Code 121 principal-residence-sale tax exemption above $250,000. The fact that you bought another house is irrelevant.
You are entitled to a $250,000 home-sale tax exemption under IRC 121 because you owned and occupied your principal residence for more than 24 months during the last 60 months before its sale.
However, your girlfriend who also occupied the primary residence cannot qualify for a $250,000 exemption, although she paid half of the mortgage payments, because she was not married to you at the time and her name was not on the title.
Nor is she entitled to any tax deduction for the half of the mortgage interest she paid. The reason is that she had no legal obligation to make those payments.
If her name had been on the title, she would have been legally obligated and entitled to a tax deduction for the share of mortgage interest she paid. It's unfortunate, but you and she did everything wrong. You owe capital gains tax on the $150,000 exceeding your $250,000 exemption.
DEAR BOB: I saw that recent item in your column about the abnormally low appraisal on a condominium refinance. As I recall, the lender's appraiser estimated a market value $157,000 below the value calculated by a second appraiser who was hired by the condo owner. I had a similar bad appraisal experience with a major nationwide lender. Because I have a 745 FICO credit score and good income, my qualifications for the refinanced 75 percent loan-to-value mortgage were not an issue. The appraiser hired by the lender told me, point-blank, that she was expected to appraise at least 10 percent below market value. I was shocked by her low appraised value of my home, despite three comparable nearby sales within the last four months for at least $35,000 more each. I demanded a reappraisal. The lender refused. So I refused to pay the appraiser her $450 fee for the dishonest appraisal. I then refinanced with another lender who used an honest appraiser. Are lenders now requiring low-ball appraisals on mortgage refinances?
-- Helene W.
DEAR HELENE: Based on your experience and those of other readers who responded, it appears some mortgage lenders have become ultra-cautious about appraisals for mortgage refinances.
Although it is against appraisal rules for a lender to instruct appraisers to "hit the number" or to "lowball" appraisals, it appears that is happening. If enough borrowers like you refuse to accept low appraisals, lenders will stop their illegal tactics.
DEAR BOB: In a recent article, you correctly said Internal Revenue Code 1031 tax-deferred exchanges must involve a trade equal or more in both price and equity. But you mistakenly went on to say that the replacement property must be a "like-kind" property. The current rule allows an exchange of any property held for investment purposes. Thus, an apartment building can be traded for bare land, etc. Please make this correction for the benefit of your readers and my clients, as I am a real estate agent -- Jim S.
DEAR JIM: You should be aware that the tax term "like kind" does not mean "same kind" of property when referring to IRC 1031 tax-deferred exchanges.
"Like kind" means the qualified property must be held for investment or use in a trade or business. Almost every property can qualify except a personal residence or dealer property, such as a home builder's inventory of houses.
To illustrate, an investor can make a "like-kind" trade of a rental house for a warehouse, or an apartment building owner can make an IRC 1031 "like-kind" tax-deferred exchange for a shopping center, as long as the trade is equal or more in price and equity without any cash "boot," which is taxable "unlike-kind" property.
DEAR BOB: I am in the process of refinancing my mortgage. What fees are unnecessary junk fees? -- Darrin B.
DEAR DARRIN: The definition of a mortgage lender's unnecessary junk fee is any charge that is not for a specific service. Examples of legitimate lender fees include the appraisal fee paid to the appraiser, title insurance paid to the title insurer, and the credit report fee paid to a credit bureau.
But a junk fee is nonspecific, often for vague services that do not benefit the borrower. Unnecessary junk fees may have creative names, such as administrative, documentation, warehouse, underwriting or loan review fee. Those services should be included in the mortgage interest rate.
DEAR BOB: I don't understand the "60 months" part of Internal Revenue Code 121 for home sales. Can I own my home for 24 months, live in it as my primary residence and qualify for the $250,000 sale exemption? Or must I own the home for 60 months and live in it for 24 of those 60 months? -- John C.
DEAR JOHN: Unless you acquired your principal residence in an Internal Revenue Code 1031 tax-deferred exchange, you do not have to own it for 60 months before qualifying for the IRC 121 principal-residence-sale exemption of up to $250,000 ($500,000 for a qualified married couple filing a joint tax return).
At a minimum, to qualify for the capital gains tax exemption, you must have owned and occupied your principal residence for at least 24 months before its sale. That means you could have purchased it as recently as 24 months before its sale if you occupied it as your primary residence for that time.
DEAR BOB: My late mother and I owned a house together as tenants in common. Her written will left everything to me, her only offspring. When I went to see a local probate lawyer, she said it would take at least six months and cost me about 5 percent of my mother's modest estate to transfer everything to me. Is this true? -- Sophie R.
DEAR SOPHIE: Unless your late mother's estate qualifies for an exception to the probate requirements in the state where she was a resident, the probate lawyer is probably correct that the estate is subject to jurisdiction of the local probate court.
The only easy title transfers without probate after a property owner dies are if the title was held in joint tenancy with right of survivorship or in a revocable living trust. Then probate court jurisdiction does not apply.
As for the probate lawyer's fee of 5 percent of the gross estate, each state has a maximum statutory fee depending on the estate's total value. However, that fee can be negotiated downward.
If the lawyer thinks you will take your business elsewhere, she is very likely to reduce her fee substantially unless there are complications, such as a contested will.
DEAR BOB: My father died this year. He left behind six adult children. I don't think he liked me very much. So he left me his worst property, out of the 26 he owned at the time of his death. It is a vacant, vandalized slum property that was once a nice house. I checked with five nearby real estate agents, and they all agree it will be very difficult or impossible to sell without extensive fix-up. They said even "vulture buyers" don't want it. There is about $7,500 of unpaid property taxes. Otherwise, it is free and clear. I don't want to fix it up, nor do I need the money from selling the property. How can I avoid getting involved? -- Wally C.
DEAR WALLY: You can renounce your inheritance of that property by notifying the estate executor or court-appointed administrator in writing. After you renounce inheritance, it will pass to another heir according to the terms of the will.
Be sure to do this promptly, before the probate court distributes the property to you according to the will. After title transfers to you, then you become the owner, and getting rid of the property could be difficult.
DEAR BOB: Our house has been listed for sale for more than five months. The local market is very slow now. The listing agent has the house on her Web site and occasionally holds a weekend open house. What can we do? We need to get our house sold before we can buy another home near my husband's new job site. -- Kendra S.
DEAR KENDRA: The primary reason a house doesn't sell is that it is overpriced. If your home has been listed for sale for more than five months, something is seriously wrong.
Ask the listing agent to prepare a new comparative market analysis. This form shows recent sales prices of similar nearby homes, the asking prices of neighborhood homes (your competition) and the asking prices of recently expired, comparable listings (usually overpriced).
The analysis should also show your listing agent's recommended asking price. If your home is overpriced, it's time to face reality and reduce the price.
Equally important, be certain your home is correctly listed in the local multiple listing service and on the local MLS Web site, the listing agent's most powerful marketing tool. Also, check your home's listing at http://www.realtor.com/, where most buyers begin their searches.
In addition, ask the listing agent to explain what she has done and is doing to properly market your home in a slow market. How often does she advertise your home in the newspapers and in local home sales magazines? She should be holding a well-advertised open house at least once a month.
In addition, she should network among the MLS member agents who sell homes like yours, to be certain they are aware of your home. Lastly, ask the listing agent whether she recommends "staging" your home to show it at its best, such as by removing old-fashioned furniture and sprucing up the interior to make it appear more attractive.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.