Who Has to Pay Up?

By Benny L. Kass
Saturday, October 20, 2007

Q: My siblings and I inherited my father's house, which he bought in 2003, in a 55-and-over community. The value of the house is depreciating, and there is no equity, as he used it all for landscaping and improvements through a home-equity line of credit. Are we responsible for paying the mortgage and the home-equity line of credit? Only my father's name is on the promissory note and deed and on the papers for the line of credit. This has become a huge financial burden on my siblings. Will our credit be affected as trustees and beneficiaries of the trust to which he left the house? -- Michelle

A: DEAR MICHELLE: You should consult a lawyer to determine the validity of the trust. Was the property actually transferred to the trust? Many people prepare trust documents but neglect to transfer the property by recording the change on land records.

If the transfer is valid, then you will not have to go to probate. However, until the property is transferred from the trust to you and your siblings, the trustee will have to continue to pay the expenses -- mortgage, taxes and insurance. If the payments are not made, the bank may want to foreclose, but that would not affect your credit.

However, if the property is still in your father's name and was not transferred properly to the trust, you will have to have his estate probated.

State probate laws differ, but here's a general outline: The court will appoint a personal representative, called an executor in some states, who will take title to the property, subject to the terms of the will.

If there was no will (shame on anyone who does not have one) the intestacy laws of the state will control. Under these laws, the legislature decides the priority for inheritance.

The executor is obligated to pay all outstanding debts, including your father's mortgage. In this situation, you and your siblings are not legally obligated to make the mortgage payments, but the house will probably have to be sold to satisfy those legal obligations.

Can you use a rental property and its necessary expenses as a deduction on your income tax? -- Alice

DEAR ALICE: Yes. If you rent out property, there are many deductions that you can take, in addition to interest and real estate taxes. For example, if you hire a real estate agent to help you find a tenant, the fee is a legitimate deduction. Other deductions include property managers' fees, repairs and insurance. You can also depreciate the property (not the land), which may save you from paying more federal income tax.

However, there are limitations if you show a loss. These are called "passive loss" restrictions, and they are complex. You should consult your financial advisers for a complete explanation.

IRS publication 527, "Residential Rental Property," is helpful. It's on the agency's Web site ( http://www.irs.gov).

I'm 61 and in need of advice regarding my mortgage. I bought a home last year using a $124,300 loan. It was a 10-year interest-only loan. At the end of 10 years, I will have to pay principal and interest at 6.75 percent, which will be fixed for 20 more years.

Would it be to my advantage to make extra payments of about $100 per month toward the principal for those first 10 years?

I don't plan to move in the next five to 10 years, but one never knows what the future holds. -- Mrs. G.

DEAR MRS. G.: If I understand the terms of your mortgage correctly, your interest payments for the first 10 years will be about $700 a month. After that time, your monthly payments for principal and interest will jump to more than $900 per month.

Paying an extra $100 a month for 10 years would reduce your overall payments by significantly more than $12,000 because as you make each payment, the principal becomes lower and thus the interest that you have to pay over the long term will be reduced. And at the end of the 10 years, your mortgage payments will still increase, but not by much. (You can find calculators on the Internet that help you figure the exact numbers, or you can consult your lender.)

That sounds like a good plan, but you do not want to be house-rich and cash-poor. You need to determine whether you can afford those extra payments now or whether they would eat into your savings.

And while no one knows what their financial situation will be 10 years from now, do you think you will have enough money for the higher mortgage payment? If you have concerns about your ability to make that higher payment 10 years from now, you may just want to put that extra $100 into a savings account or a certificate of deposit that gets you the best interest rate your bank will offer. Then, 10 years from now, you will at least have built up a nest egg of $12,000, plus interest.

You may also want to watch the mortgage market. If 30-year fixed mortgage rates come down somewhat, you might want to get rid of that interest-only loan and get a fixed rate. At that time, it definitely would make sense to start paying extra each month.

I recently purchased a home and received a disclosure form that stated that the previous owner had died in the house. I did not have a problem with this. However, after I moved in, a neighbor told me that the previous owner was dead in the house for more than two weeks and that her body had decomposed on the carpet. This explains the smell in the house.

Now I have to change the carpet to remove the smell. Do I have any way of recovering at least some of the cost of replacing the carpet since the seller and the agent failed to mention the full specifics of what had transpired in this house? I feel that they acted in bad faith by hiding this important fact from me. I would not have bought this house had I known this. -- Carlos

DEAR CARLOS: There are some state laws that specifically require sellers to disclose to potential purchasers that there was a death on the property. However, in the absence of a provision in your state law that requires more detail than that, you may be out of luck.

Read the disclosure form carefully; is there a question that would assist you, such as "Are there any unusual things about the house?"

My advice to all potential buyers is to ask, "What else do you know about the house that I should know about?" This way, if the agent or the seller does not disclose, you may have a case against them. You may also want to file a complaint with the local real estate commission against the agent who did not disclose all the facts.

In the future, you should have an independent professional home inspector check out the house. The smell should have alerted you to a possible problem, and you should really have asked questions before you went to closing.

Benny L. Kass is a Washington lawyer. Questions for this column can be submitted to benny@inman.com.