Homebuying Basics: Refinancing Your Mortgage

Q: DEAR BOB: We just refinanced our condo, receiving part of our equity in cash. Is the money we received taxable? -- Sheila D.

A: DEAR SHEILA: No. When you refinance your mortgage and take out all or part of your home equity in cash you owe no tax on the cash. Borrowed money must eventually be repaid, whether you do so over the life of the mortgage, such as 20 or 30 years, or when you sell the condo and pay off the mortgage balance in full.

If your new refinanced mortgage exceeds your home's adjusted cost basis (as it probably does), such as a $200,000 mortgage on a condo you bought for $150,000 several years ago, that is a "mortgage in excess of basis." There is no tax on such an "excess mortgage" at the time of refinancing. When you sell your condo, however, you have an excess mortgage when that $50,000 cash-out money becomes part of your resale profit, even though you already received that $50,000.

Of course, when you sell and if your principal residence capital gains sale profit is less than $250,000 under Internal Revenue Code 121 you owe no capital gains tax if you owned and occupied the home at least 24 of the last 60 months before its sale. That exemption includes any excess mortgage "cash out" amount.

DEAR BOB: Is there any defense for a partition lawsuit where one co-owner wants to force a property sale, but the other co-owner doesn't want to sell? -- Madison T.

DEAR MADISON: It is up to the trial court judge to grant or deny a real estate partition lawsuit where one co-owner seeks a forced sale of the property but the other co-owners don't want to sell. My experience has been 95 percent of all partition lawsuits are granted by the court to force the sale of the property, with the sale proceeds divided among the co-owners. Consult a lawyer for details.

DEAR BOB: I bought a vacant lot that was supposed to be 5,000 square feet, but the title insurance company didn't report an easement for about 1,600 square feet. As a result, I can't build the house I want unless the house size is reduced. Can I get payment from the title insurance company for my problems and losses? -- Sergio D.

DEAR SERGIO: If you bought an owner's title insurance policy, the title insurer must either pay to get the undisclosed recorded easement removed, or pay you the diminished market value of your property with the recorded easement, which the negligent title insurer failed to disclose to you.

Of course, if you didn't buy an owner's title insurance policy, even if you paid for a mortgage lender's title policy, you have no claim against the title insurer, though the mortgage lender has a valid claim under the lender's title policy.

If the easement was not properly recorded or obvious from a visual inspection, such as a power line easement, then it is not a valid easement and the title insurer has no liability. Consult a lawyer to determine your legal rights against the title insurer.

DEAR BOB: I am considering buying a property in my neighborhood that needs to be rehabilitated. The seller wants to sell for about $200,000, but I want to pay only about $100,000. I know the value after renovation will be more than $700,000. Can I ask the seller to add me to the title so I can obtain financing to pay the rehab costs, and then split the profits?

-- Lisa M.