QUESTION: My wife has her eye on owning a particular home for sale. The asking price is $145,000. It's worth every penny. The existing assumable mortgage is about $73,000 at 9 1/2 percent interest, and we can afford a $20,000 cash down payment. The problem is the seller needs $45,000 cash from the sale. The agent says if the seller gets a $45,000 down payment, she will finance the balance at 10 percent interest. Any ideas?
ANSWER: That's easy. In most communities there are second mortgage lenders who will gladly made a loan for the additional $25,000 needed to put your sale together. The seller then can carry back a third mortgage for the balance.
If you buy at $145,000, the sale will look like this. You make a $20,000 down payment, take over the old low-interest-rate $73,000 first mortgage and borrow $25,000 on a "hard money" second mortgage. Sources of such a loan include banks, finance companies, mortgage brokers and individual lenders. The $27,000 balance can be a third mortgage to the seller.
Although you will pay a high interest rate on the second mortgage obtained from a commercial lender, it's cheaper to do that than to refinance the old cheap interest rate first mortgage. Your seller's third mortgage at 10 percent interest results in an affordable finance package.
The second mortgage is called a "hard money" loan because the lender loans cold, hard cash. By contrast, the seller's third mortgage is "soft money" because no cash actually changes hands.
QUESTION: I enjoyed your recent explanation of the Franklin Biggs court decision on tax-deferred exchanges. Do you think this means "anything goes" now in "like-kind" trades? I ask because I want to acquire a large commercial building, but its owner wants a straight sale and refuses to cooperate on a tax-deferred exchange.
ANSWER: The new Biggs case (632 F.2d 1171) is the most liberal tax-deferred exchange decision yet. It indicates federal courts, if possible, like to find a tax-deferred "like-kind" exchange occurred. But it doesn't mean "anything goes."
The IRS can be expected to continue challenging creative property trades. However, with the aid of a real estate or tax attorney, and the guidance given by the Starker and Biggs court decsions, you now probably can create a trade which will meet your seller's wishes and the tax-deferred exchange requirements of Internal Revenue Code Section 1031.
QUESTION: For many years we have owned a summer vacation home about 40 miles from our full-time city home. We want to sell our city house, winterize our vacation home and live in it year-round. Our profit on the sale of our city home should be about $45,000. If we sell and put the money into improving our vacation home, will this qualify us for deferring our profit tax?
ANSWER: No. To qualify for the "residence replacement rule" of Internal Revenue Code Section 1034, you must buy a replacement residence within 18 months before or after selling your old principal residence.
Since you already own the summer home, it can't quality you for tax deferral on the sale of your current principal residence even if you invest the money in its upgrading. Ask your tax advisor to explain further.
QUESTION: I am a high school teacher who uses a desk in my home for grading papers, writing exams, and preparing for classes. Do you think I can qualify for that home business use tax deduction?
ANSWER: No. The home business use tax deduction requires (1) an exclusive "business area" of your home, and (2) it must be either (a) your principal business location or (b) where you meet business clients.
If you are an employe, in addition such home business use must be "for the convenience of your employer." Your home business use doesn't seem to meet these tests, but check with your tax adviser for more details.
QUESTION: I recently bought a house, and the seller financed my purchase on a wrap-around mortgage for 100 percent of the sales price. Since he wanted to be sure I would keep up the house, we agreed that I would pay the first year's mortgage payments to him at the time of the sale closing. Most of these payments are interest. Will they be tax deductible for me on my 1981 tax returns?
ANSWER: I don't see why not. Your "nothing down" creative finance idea turned what would normally be a non-tax-deductible down payment into mostly tax deductible interest.
There is no tax law requiring a down payment. Of course, that interest is taxable to your seller as ordinary income. Your tax adviser can give you further information.