DEAR BOB: I sold my property and took back a 20-year mortgage. The note says the payment is to be $263.61 per month "or more," including principal and interest. Does "or more" allow the borrower to avoid paying interest on prepayments of principal? Ann B., Falls Church.
DEAR ANN: Yes. The magic words "or more" allow your borrower to prepay the mortgage. Mortgage interest is computed on a simple interest basis on the remaining unpaid balance.
The borrower must pay at least $263.61 per month. But principal prepayments reduce the interest cost and the term of the loan. Your attorney can give you more details.
DEAR BOB: Fourteen years ago we paid $20,000 for a house we bought in a small town for income purposes. We recently sold it for $40,000 with a $15,000 cash down payment and are carrying a $25,000 10-year mortgage for the buyer. Do we have to pay any income taxes on the $40,000 even though we have not received it all yet? Mr. P. K., Washington.
DEAR MR. P. K.: Yes. It appears you made a costly mistake that will result in your entire profit being taxable now, even though you will receive most of it in future years.
To spread out your profit tax over the years of the buyer's payments to you, the tax law says you cannot receive over 30 percent of the gross sales price in the year of sale. On a $40,000 sales price, that's $12,000 maximum. Since you received a $15,000 down payment, you exceeded the installment sale limit so your entire profit is taxable in the sale year.
You said the house was bought "for income" so I assume it was not your principal residence. Therefore, the "over 55 rule" $100,000 tax exemption and "residence replacement rule" tax deferral aren't available.
Fortunately, the tax bite won't be too bad since only 40 percent of your profit is taxable as long-term capital gain. The other 60 percent escapes federal tax.
Assuming your depreciated book value is about $10,000, your profit would be $30,000. The taxable 40 percent is $12,000 and $18,000 escapes tax. If you are in a 30 percent income tax bracket, for example, your federal tax will only be about $3,600. In the future, consult your tax advisor before the sale to minimize your profit tax even further.
DEAR BOB: I've been enjoying your articles for several years. You mentioned there was a new mortgage idea for elderly people who could borrow on a "reverse mortgage" on their home. I contacted the president of the savings and loan where I have my account and he said he had never heard of these loans. Where are they availabe? James M., Wheaton.
DEAR JAMES: Regretfully, reverse annuity mortgages are no more available today than when I first wrote about them several years ago. The idea is to loan a specific monthly amount, such as $200, up to a maximum limit. iThe security is a mortgage on the borrower's home. No repayment is required until the borrower either dies or sells the house.
As far as I know, only Broadview Savings of Cleveland, Ohio and Deering Savings of Portland, Maine offer reverse mortgages. Perhaps if you and other retirees put pressure on savings associations, more will offer them.
DEAR BOB: We plan to sell our home and build one in Barbados. Does that "residence replacement rule" of Internal Revenue Code 1034 apply to this situation? Sylvester E., Springfield, Va.
DEAR SYLVESTER: Yes. This tax deferral law does not require your replacement principal residence be in the U.S. To qualify, the replacement must be bought and occupied within 18 months before or after the sale of your old home. Your tax advisor has complete details.
DEAR BOB: I went to a free lecture by a real estate man selling an investment seminar class. He said one of the things taught, for $500, is the best day of the month to buy income property. What is the day? Rube W., Washington.
DEAR RUBE: The best day to buy income property is the day after the rents are collected. The reason is that the buyer is then credited with that rent money, minus one day's rent, thus reducing the amount of cash needed to close the purchase.
DEAR BOB: My sister and I owned our house in joint tenancy with survivorship. She died last month. Her will gave her assets to the Catholic Church. Does this mean I will lose the house? Laura T., Arlington.
DEAR LAURA: No. Joint tenancy with right of survivorship property is not affected by the terms of a will. As surviving joint tenant, you own the house alone now. Ask your attorney to explain further.
DEAR BOB: How soon do you expect mortgage money to become available and affordable again? We tried to buy a home but found we couldn't qualify for a mortgage. The loan officer told us, in confidence, that no one qualifies today because interest rates are too high and his bank has no money to lend. When is this going to change? Della M., Laurel.
DEAR DELLA: I wish I knew the exact answers to your questions, but those answers are political. Housing, both new and resale, is bearing the brunt of anti-inflation political actions in Washington.
The mortgage money supply was shut off, practically overnight, and it can be turned back on just as fast. You'll see that happen sometime between now and the fall elections.
In my opinion it's time that home mortgage money be separated from the rest of the money market. If this doesn't happen, it will remain difficult for home buyers to acquire homes except with seller financing.
Congress can turn the mortgage money supply back on, at affordable rates, by exempting from taxation the interest earned on savings accounts at institutions investing in mortgages. When this happens, you'll see money again flowing into banks and savings associations. Until then, the smart money will stay out of savings accounts that pay dismal interest rates, lower than the inflation rate, which Uncle Sam still has the nerve to tax.
But don't let this stop you from buying a home. There are terrific finance bargains offered by sellers who will finance the sale for you. Work with a good realty agent to find and finance a house or condominium.
DEAR BOB: We are in our 50s (second time around) and would like to buy a house. Our problem is we lack cash for a down payment. My husband is a veteran so we could get a no down payment VA home mortgage. Our combined annual income is about $28,000, plus $4,000 military retirement. (1) Should we buy a new home? (2) Can we buy an older home with a VA loan? (3) What is the maximum VA loan we could afford? Mrs. T. C., Rockville.
DEAR MRS. T. C.: (1) Although you can buy either a new or resale home with a VA mortgage, it's usually easiest to finance a new home with a VA loan. The reason is most builders will pay VA loan processing and discount fees but many individual sellers refuse to pay the necessary loan points for the VA buyer.
(2) The maximum VA home loan available depends on the current goverment-set interest rate which changes frequently. For complete details on VA and FHA home loans, visit your approved bank, savings association or mortgage broker.