Occupancy Test Strict for Home Sale Tax Exemption

DEAR VALERIE: If your niece can qualify for a mortgage, she should do so without you first deeding the house to her. You could agree, for example, to sell the house to her with an 80 percent lender mortgage, and you can carry back a second mortgage for the balance of the sales price.

There's no advantage for you to deed your house to your niece without receiving cash or at least a first mortgage from her for your security. Consult a lawyer, and get it all in writing.

DEAR BOB: Why don't you warn people about the dangers of gift deeds? My mother was diagnosed with terminal cancer. I am her only child, and she wanted to gift-deed her house and two rental properties to me to avoid probate after her death. Her attorney prepared the gift deeds, and I recorded them. Little did I know how costly that would be. A few months later I received notices from the county tax assessor that the properties would be reassessed. At the least, this will result in several thousand dollars higher annual property tax. But the bigger surprise is that the cancer diagnosis was wrong. My mother has another disease, and now it looks as if she will live for many years. Even if I deed the properties back to her, the tax assessor says he will still reassess them. -- Todd W.

DEAR TODD: You left out a much greater disadvantage of a lifetime gift deed. Because you received those properties as lifetime gifts, you took over your mother's low adjusted cost basis. If you had instead inherited those properties, you would have received a new "stepped-up basis" to market value on the date your mother passes on.

When you eventually sell those properties, you will have a large taxable capital gain, most of which could have been avoided by instead inheriting those properties. Your mother meant well to avoid probate, but she could have kept ownership, given you a stepped-up basis and avoided probate by use of a living trust.

DEAR BOB: We are having great difficulty selling our rural house. It has been listed for sale about eight months with only one offer. The buyer will obtain a 70 percent first mortgage, pay us 5 percent down payment and give us a 25 percent second mortgage. However, this is to be an unrecorded "silent second" mortgage. The real estate agent says the idea is to make the mortgage company think the buyer is paying 30 percent cash down payment. He says it is done all the time, especially with "difficult" properties such as ours. What is your advice about a silent second mortgage for us? -- Vickie V.

DEAR VICKIE: An unrecorded silent second mortgage is a fraud on the mortgage lender. I know it goes on, and lenders rarely prosecute the borrower or seller. However, an unrecorded silent second mortgage is dangerous for you. If you don't record it, and if the borrower doesn't make the payments to you, you can't foreclose to get the property back if your second mortgage hasn't been recorded.

At the least, you should record your silent second mortgage after a week or so. But you should be aware that before it gets recorded, your buyer might incur liens, which would have priority over your later-recorded second mortgage.

For example, your buyer might have a prior judgment lien, income tax lien, child support lien or other possible liens, which could attach to the property. If you decide to proceed, be aware of your high risk and do everything possible to minimize it. Consult a lawyer for details.

DEAR BOB: We obtained a senior citizens reverse mortgage in 2004. Recently, we received a letter from our mortgage company outlining why we should refinance to obtain greater reverse mortgage benefits. Is this possible? -- Jopie C.

DEAR JOPIE: Yes. Reverse mortgages can be refinanced. Perhaps your home has greatly appreciated in market value. The reverse mortgage lending limits have increased substantially in the last two years, making today's reverse mortgages more attractive than a few years ago.

If you have a need for increased funds, I suggest you inquire about the possibilities for refinancing your reverse mortgage.