The Truth About Negative Amortization

DEAR BONNIE: My first suggestion is to fire that CPA for giving bad advice. Your future husband already qualifies for his $250,000 principal-residence-sale exemption from Internal Revenue Code 121 because he owned and occupied his home 24 of the 60 months before its sale.

However, if you are to qualify for an additional $250,000 exemption, you must occupy the home as your principal residence at least 24 of the 60 months before its sale. If you are not married on the date of the sale, then your name must have been on the title at least 24 months to qualify.

But you indicate that you will be married by the date of the sale of his house. In addition to proving your 24 months of occupancy, you must also file a joint tax return in the year of sale.

DEAR BOB: When I die, I want to leave my home to my four adult children. If I take my name off the title and put their names on the it now, will this avoid probate when I die? I can't afford one of those revocable living trusts you recommend. -- Josephine A.

DEAR JOSEPHINE: Your plan could be very bad for you and your adult children. By deeding your house to your children now, you give up control.

For example, suppose your health declines and you need to sell the house to provide funds for your care in an assisted-living or convalescent home. If you give away the house now, you won't have it available to sell when you need its cash proceeds.

Yes, deeding the house to your adult children now avoids the need for its probate after your death. But the gift does a disservice to them because they will take over your presumably low adjusted-cost basis. When they eventually sell your home, they will probably have a substantial capital gain tax to pay.

A simple living trust prepared by a lawyer shouldn't cost more than $1,000, possibly much less. With a living trust, you can maintain control of your home while also providing for avoidance of probate costs and delays when you die.

DEAR BOB: Last August, my fiancee and I bought a house together with equal ownership. Both names are on the title and the mortgage. The lender's IRS 1098 form we received for 2005, however, lists both our names but only her Social Security number, though I am the person who made all the mortgage payments. The bank says they can't change the Social Security number for 2005, but they will do so for 2006. What should I do? -- Lorne C.

DEAR LORNE: Because you paid the 2005 mortgage payments and you are on the title to the house, you are entitled to deduct the mortgage interest you paid (and the property taxes if you also paid them).

Although it is unlikely that the IRS will audit you on this issue, be prepared to show your canceled checks or other evidence of mortgage interest payments. Of course, be sure your fiancee doesn't claim the same interest deduction on her tax returns.

DEAR BOB: About six years ago, I deeded the title to my house to my son and daughter-in-law. Now they are getting a divorce. Although I have a life estate in my house so they can't kick me out, the daughter-in-law wants half the value of my house in the divorce settlement. Is this legal? Can I get my house back? -- Harold V.