REAL ESTATE MAILBAG
After a Spouse's Death, When Should You Sell?
Q: DEAR BOB: My husband has a terminal illness. I wonder how long I have after he passes away to take advantage of his $250,000 principal-residence-sale tax exemption. We have owned our home for 30 years and have no mortgage but a lot of equity, thanks to market-value appreciation. I want to stay in the home for a while, but I don't want to miss out on his exemption. -- Geri D.
A: DEAR GERI: Please don't rush to sell your home after your husband dies. Making quick decisions after the death of a loved one is often a major mistake.
If you sell your home in the tax year of your husband's death, you can still use the $500,000 principal-residence-sale tax exemption for a married couple, thanks to Internal Revenue Code 121. That's presuming you both met the 24-out-of-last-60-month occupancy requirement and that title is held in at least one spouse's name.
You should be aware that if he leaves his half of the house to you, as I presume he will, you then receive a new stepped-up basis on your inheritance. In a common-law state, this would be a 50 percent stepped-up basis. In community-property states with the names of both spouses on the title, then a new 100 percent stepped-up basis to market value on the date of death applies.
Thanks to the generous stepped-up-basis tax rules, there is no need to hurry to sell the home in the year of your husband's death. For details, consult a tax adviser.
DEAR BOB: What is meant by the real estate term "short sale"?
-- Rich F.
DEAR RICH: A short sale means the mortgage is in default and the lender agrees to accept a sales price below the amount that is owed on the mortgage as payment in full.
This situation usually occurs when a home has declined in market value or the home was financed for more than it was worth. For example, suppose a mortgage in default has a $200,000 balance, but the home's fair market value is only $180,000. If the lender agrees in advance to accept a $180,000 short sale as full payment, then the title can be delivered to a buyer who agrees to pay $180,000.
However, the defaulting borrower will have $20,000 of taxable debt relief income, as shown on the lender's IRS 1099 form sent to the borrower and the IRS. Lenders who agree to short sales insist that borrowers not receive any cash from a short sale. For details, consult a mortgage lender.
DEAR BOB: How can you recommend a reverse mortgage instead of a home-equity line of credit for a senior citizen homeowner? As a loan officer, I am often frustrated with your advice. I run my lines of credit for my clients at almost zero commission to myself. With fees of only about $175 including the appraisal, there isn't room for much commission. Reverse mortgages should be outlawed. I will never do that type of mortgage for my clients. Reverse mortgages require mortgage insurance. The commissions I've seen are about four points. I am appalled. Seniors who have equity in their homes should do a cash-out refinance and have a financial adviser manage their money. This is the most cost-effective loan. And they get to keep their house. -- Jamie B.
DEAR JAMIE: I am shocked a loan officer like you doesn't fully understand reverse-mortgage benefits. If a senior citizen has little or no income, how can he or she afford the payments on a home-equity loan or a refinanced mortgage?