DEAR BOB: Three months ago the man who holds the second mortgage on our home called to ask if we would be interested in paying off his loan in return for a $1,500 discount. We agreed to do so. Now we learned we have to sell our home, due to a job transfer. Is the discount taxable? Vic B. Rockville.
DEAR VIC: You can treat that discount in one of two ways: (1) you can report it as ordinary income on your tax returns or (2) you can reduce the basis of your home by $1,500. In most cases, the second method is best, but ask your tax adviser for his or her opinion.
DEAR BOB: In 1972 we sold one home and bought a more expensive replacement, so we deferred our profit tax. If we sell the second home, can we use that new $100,000 tax break to avoid tax on both profits? Harold P., McLean.
DEAR HAROLD: To qualify for the new $100,000 home sale tax break, your or your spouse must be 55 or older on the title transfer date and have owned and lived in your principal residence three of the five years before its sale. Yes, you can use this benefit to exempt from taxation, not only the profit on the sale of your present home, but also any deferred profits from previous home sales when you used the "residence replacement rule" of Internal Revenue Code Section 1034.
DEAR BOB: Several months ago the government said that savings and loan associations could make those "reverse mortgage" loans. As we own our home free and clear, and are retired on limited pension and social security income, a reverse mortage would solve our living expense problems. But I called all the banks and savings associations in town and not one has any plans to offer these new mortgages. When can I get one? James B., Vienna, Va.
DEAR JAMES: As you know, a reverse mortgage is a loan on the equity in a person's home, paid to the borrower in monthly payments, up to a maximum loan amount No repayment is required until the house is sold or the borrower dies. This concept is ideal for retirees who need extra income for living expenses.
As of of last Jan. 1, federal savings and loan associations can make reverse mortgage loans. However, each S&L must have its reverse mortgage plan approved by the Federal Home Loan Bank Board. As far as I know, no such plan has yet been approved. In fact, the only reverse mortgage lender I know of is Broadview Savings and Loan in Cleveland. It looks like a long wait before reverse mortgages become widely available.
DEAR BOB: My husband and I plan to sell our country property to move closer to the city. We would like to know what happens if we put our home up for sale and it has not sold by the time we find a new home near the city? Can we have a contract on the new home until ours is sold? Gale S., Warrenton, Va.
DEAR GALE: Yes. Contingency clauses are the answer to your problem. Almost every home purchase offer contains one or more such clauses.
For example, when you find a city home you want to buy, make your purchase offer to buy it. But specify in the offer that it is contingent upon sale of your present home within, perhaps, 60 to 90 days for a specified price. You and your agent will have to convince the seller your home has a reasonable chance of selling. A listing agreement with a reputable broker can be very convincing.
If your curent home is realistically priced, it should sell within the contingency period so you can buy the new home. Other contingency clauses often used in purchase offers are (1) contingencies for obtaining necessary mortgage financing, and (2) contingencies for complete inspection and approval of the property by a contractor or other qualified inspector.
DEAR BOB: In 1978 we sold our home for a fantastic price. It was so good that we agreed to charge the buyer only 5 percent interest on the second mortgage we took back. Our CPA says the IRS will impose 7 percent interest on us. Is this true? Jones M., Laurel.
DEAR JONES: Yes, your CPA is correct. If you don't charge at least 6 percent interest on a property installment sale, the IRS can impute interest at 7 percent on the payments received.In other words, the IRS discourages attempts to convert interest (ordinary income) to long-term capital gains (by raising the sales price), which are taxed at the lowest tax rates.
DEAR BOB: We're Puerto Rican and are encountering discrimination buying a home in a new development. The sales agents either ignore us or try to discourage us from buying. How can we complain? Sam L., Washington.
DEAR SAM: Everyone encounters some difficulty buying a home, whether it is difficulty financing the purchase, arranging for all the details, or something else. But if you are being prevented from buying, or if the lender is giving you trouble, contact the nearest office of the Department of Housing and Urban Development. Most housing discrimination complaints are settled easily. But if settlemet can't be reached, HUD will seek an injunction and damages to enforce your rights against housing discrimination.
DEAR BOB: How do I compute the equity in my home? Kim J., Front Royal, Va.
DEAR KIM: Equity is the difference between your home's fair market value and the amount you owe on its mortgages. For example, if your home is worth $75,000 and you owe $50,000 on it,,25,000 is your equity.
DEAR BOB: Please repeat that simple formula to use for determining the true mortgage interest rate when applied to a taxpayer's personal income tax bracket percentage.Jerry H., Kensington.
DEAR JERRY: First, estimate your combined federal and state income tax bracket. You can estimate it from the tax rate schedule on your income tax returns. Second, multiply that tax bracket by the interest rate on your mortgage. Third, subtract the result from your mortgage's interest rate to find our you after-tax mortgage interest rate.
For example, suppose you have a mortgage at 10 percent interest and you are in a 30 percent combined federal and state income tax bracket. Thirty percent of 10 percent is 3 percent. Ten percent minus 3 percent is 7 percent, which is your mortgage's after-tax interest cost.
Readers desiring the report, "How to Sell Your Home With or Without an Agent," should send 25 cents plus a STAMPED self-addressed envelope to Robert J. Bruss, P.O. Box 6710, San Francisco, Calif. 94101.