Split the Mortgage, Get Tax Benefits?

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.