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Real Estate Mailbag

By Robert J. Bruss
Saturday, April 9, 2005; Page F20

Q DEAR BOB: I am applying for a reverse mortgage, but I think you should warn readers about the high up-front fees so that it is not a big shock, as it was to me. The closing costs in my situation will be almost $15,000. In my case it seems that it is worth paying these expenses for a lifetime of tax-free income.

-- Ruth G.

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ADEAR RUTH: Yes, the upfront loan fees to obtain a senior citizen tax-free reverse mortgage seem high, but they are reasonable if you stay in your home for more than five years.

Before you obtain your reverse mortgage, the lender must provide you with a Total Annual Loan Cost disclosure chart based on two years, your life expectancy, and even beyond your expectancy. If you keep your reverse mortgage two years, the annual interest rate including upfront loan costs will usually be at least 12 percent, often more. At 10 years, your annual cost typically drops to a much more reasonable 6 or 7 percent interest.

That's why I advise against obtaining a reverse mortgage unless you plan to stay in your home at least five years. A book explaining this topic is "The New Reverse Mortgage Formula," by Tom Kelly.

DEAR BOB: I am a widow, 68, who made a mistake about five years. Shortly after my husband died, my two adult sons persuaded me to deed my home to them in case I had to go to a nursing home the way my husband did before he died. Now I want to sell my home and move to Florida or Arizona. They don't like my idea and refuse to sell the house so I will have the money to buy a retirement home in a warm climate. What can I do?

-- Alice H.

DEAR ALICE: Because you no longer hold title to the home where you live, there isn't anything you can do to force your sons to sell the house and give you the money to buy a Florida or Arizona retirement home.

Although I hope you retained a written life estate in the house and can live there as long as you desire, your life estate has little or no market value. The reason is that when you die, your life estate dies.

Unless you have some written agreement with your sons, or can prove fraud or duress, I know of no way you can get back the title to your home so you can sell it. Talk to a local real estate lawyer, but don't get your hopes up.

DEAR BOB: My husband and I own a duplex where we have lived in one unit for almost 20 years. It has greatly appreciated in market value. A real estate agent told us he can get a price that will give us roughly $350,000 profit. Having religiously read your articles every weekend for a long time, we know we can use our $500,000 principal residence sale exemption on the profit from the sale of our personal unit only. We would still owe capital gain tax on the profit from the sale of the rental unit. My question is can I (or my husband) move into the rental unit, live there for 24 months, and then can we claim the $500,000 principal residence sale exemption? -- Cynthia R.

DEAR CYNTHIA: Yes. You can kick out the rental unit tenant and then move into the rental unit for at least 24 months before selling the property. In fact, you can both move in together. The tax reason is you have already met the 24-month occupancy test for your current unit.

After 24 months occupancy of the former rental unit, then the entire property will qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $500,000.

However, I must warn you that the federal government will "recapture" the depreciation you have deducted on the rental unit so your $500,000 exemption won't eliminate that special tax. Consult a tax adviser for details.


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