Q. DEAR BOB: My husband and I bought our house last October, but now he wants to sell. Houses in our neighborhood are selling for at least $20,000 more than our purchase price. I'm worried that the mortgage company will penalize us for selling after just a few months. My husband insists our profit will offset any bad consequences. What should we do?--Kelly W.
A. DEAR KELLY: Get out your mortgage or deed of trust. Does it contain a prepayment penalty? If it does, that means the mortgage lender can extract additional interest if you pay off the mortgage too soon. Typical prepayment penalties for the first five years of the mortgage are six month's interest on 80 percent of the mortgage balance.
Most prepayment penalties were abolished about five years ago. Fannie Mae and Freddie Mac encouraged their lenders to stop discouraging early mortgage payoffs because of refinancing. However, in the last year or so, mortgage lenders started putting prepayment penalties back because so many homeowners were refinancing when mortgage interest rates dropped.
Although you didn't give your home's market value, if you sell and have to pay a real estate agent a sales commission of about 6 percent and also have to pay a mortgage prepayment penalty, you'll be lucky to break even. Stay where you are unless you enjoy losing money.
DEAR BOB: I read your recent item about the prisoner who was in jail for 37 months and missed out on the $250,000 home-sale tax exemption because he had only 23 months home occupancy. But you pointed out a loophole in Internal Revenue Code 121 that allows him to use 23/24 of the exemption if he can sell his home by Aug. 7, 1999.
Would the same loophole apply for a married couple so we can get a percentage of our $500,000 exemption? We have lived in the house as our principal residence only 20 months within the past five years.--Ronald H.
DEAR RONALD: Yes. The same temporary tax break for partial use for residences owned on Aug. 7, 1997, and sold by Aug. 9, 1999, applies to the $500,000 exemption for married couples. Consult a tax adviser for full details.
DEAR BOB: My mother, who lived in Montana, died last March. Her living trust and will named my sister and me as the beneficiaries of her estate, which consists of personal belongings, a car worth $800 and a house with about $50,000 equity.
Selling her household furnishings was no problem. But when we sold her car, we had trouble with the Montana Department of Motor Vehicles, which required proof that we were the personal representatives and successor trustees of her living trust. Now we are concerned that we'll have problems selling her house. How should we proceed?--Larry H.
DEAR LARRY: Consult a title insurance company officer near your mother's residence. The real estate agent with whom you plan to list the house can recommend such a title officer. Unlike automobile transfers, which are handled by state motor vehicle departments, real estate title transfers are private. When selling real estate, you need to be able to convey "marketable title."
The title insurer will probably require a copy of your mother's living trust. If she properly deeded her house into the living trust, and you and your sister are successor trustees, you shouldn't have a problem conveying marketable title.
However, many realty owners fail to deed their real estate and other major assets into their living trusts. When that happens, those assets go through costly and time-delaying probate proceedings. For further details, consult a Montana real estate lawyer.
DEAR BOB: Your report of the Iowa couple, ages 89 and 86, who bought their house with a reverse mortgage and no monthly payments interested me. My parents have a similar situation. They want to sell their Midwest home, in which they have only about $50,000 net equity, and buy a Florida house. How can I find a reverse mortgage lender for them?--Bennie W.
DEAR BENNIE: The situation you describe is not the typical reverse mortgage in which a senior citizen homeowner needs additional lifetime monthly income or lump sums for major expenses, such as a new roof or other home repairs.
Fannie Mae is the only nationwide reverse mortgage lender for senior citizen home purchases. The major advantage is that the home buyers, like your parents, will have no monthly mortgage payments. You can phone 1-800-732-6643 for names of reverse mortgage lenders making senior citizen home-purchase mortgages.
DEAR BOB: I own a rental house that I want to give to my son. Can I use a quit-claim deed to convey it to him? If I sell it to him for less than market value, what taxes will be applied? The income tax seems to be the problem.--Mr. H.J.
DEAR MR. H.J.: First, you said you want to give the rental house to your son. Next, you said you want to sell it to him. Which is it?
It is simple for you to make a gift of the house to your son via a quit-claim deed. You will also need to fill out an IRS gift-tax return for the gift, but you probably won't owe any gift tax unless you have given away more than $650,000 of gifts during your lifetime.
If you sell the house to your son, however, you must report the capital gain on Schedule D of your federal income tax return. Be sure the mortgage lender agrees to let your son assume any existing mortgage. Whatever you decide, consult a tax adviser for full details.
DEAR BOB: We recently became involved in a tax-deferred exchange. Our son contracted to buy a house, using his investment property for the down payment, but his buyer's purchase was delayed. We stepped in and bought his investment property at market value. How soon can we sell this property? Do we have to hold it for two years or will we incur exchange penalties?--Norma S.
DEAR NORMA: Let me get the facts straight. You bought your son's investment property at market value. That doesn't look like a tax-deferred exchange to me. If there were a tax-deferred exchange, the acquiring, related buyer must hold the property at least two years; otherwise, the original owner is taxed on the resale profit.
Your son is the one with the tax problem, not you. Since he sold the property to you at market value, he owes capital gains tax on his sale profit. That's not an exchange, just a taxable sale. For further details, you and your son should consult a tax adviser.
DEAR BOB: My neighbor trimmed the branches of my tree back to the property line between our houses. Now I'm afraid the lopsided tree will fall on my house in the next big storm. What can I do?--Berta C.
DEAR BERTA: A "rule of reasonableness" applies. If your neighbor excessively trimmed the tree, thereby causing the tree to fall on your house, he is liable to you for the damage. Fortunately, such damage is covered by your homeowner's insurance policy. The insurer might subrogate and seek damages from your tree-trimming neighbor.
I am not aware of any legal remedy for you at the present time since no damage has yet occurred. From your description, it appears there is nothing you or the neighbor can do until a storm blows the tree over on your house and causes damage. For more details, consult a real estate lawyer.
DEAR BOB: We need to buy a larger house for our family of five, but we're not sure how soon our current house will sell. Without the sale, we don't have enough money to buy a larger house. However, we have $70,000 in equity in our present residence. If we sell it first but can't find a suitable replacement home, we could be out on the streets. What should we do?--Clarence S.
DEAR CLARENCE: The best advice is to sell your old house before buying a new one. However, I realize it might be difficult finding a large enough house to purchase for your family.
An easy, but not inexpensive, solution is a "bridge loan." That means a lender, such as your bank, lends you most of the equity in your current residence for the down payment on a house you want to buy.
The problem is you might wind up making payments on your current mortgage, the mortgage on the new house you buy and on the bridge loan. A better and cheaper solution is to sell your old house first but provide for a long closing time, such as 90 days, to give you time to find a suitable replacement home.
DEAR BOB: My wife and I have owned a rental condominium for about 20 years. We are considering selling it because we are now ages 70 and 80. Because we own it free and clear, we want to carry back the mortgage for income.
What is the average down payment we should expect? What happens if the buyer defaults on the condo association dues, taxes or our payments? Are interest rates higher or lower than market rates on seller financing?--John T.
DEAR JOHN: Congratulations on realizing the seller benefits of carrying back the mortgage for your buyer. Easy seller financing usually results in a quick, easy sale for top dollar, especially for a condo.
For your protection, the buyer should make a 10 percent to 20 percent cash down payment. Be sure the mortgage specifies that if the buyer defaults on the condo association dues, property taxes or, of course, your monthly payments, that is a default allowing you to foreclose.
My experience in carrying back seller financing has been that I can get at least one-half a percent higher interest than for market-rate mortgages. To illustrate, if home loans are at 7.5 percent, you should get 8 percent on your seller-financed mortgage. But don't argue over the interest rate and lose a profitable sale. For further details, consult a real estate lawyer.
DEAR BOB: I own vacant property in Colorado. When I sell this property, can I transfer my capital gains, plus the property value, to the value of a new property here without paying taxes? This assumes the property purchase price is equal to or lower than the Colorado proceeds and does not go over the $500,000 for dual owner status.--Hilbert T.
DEAR HILBERT: You seem confused about profit taxation when selling real estate. I'll try to clarify the situation.
Was the Colorado property your principal residence? If you owned and lived in it an "aggregate" of any two of the last five years before the sale, then up to $250,000 ($500,000 for a married couple filing jointly) of your home-sale profits is tax-free. There is no requirement that you buy a replacement principal residence.
However, if the Colorado property was not your residence and was held for investment or use in a trade or business, then it can qualify for a tax-deferred exchange. Internal Revenue Code 1031(a)(3) allows you to sell such property, have the proceeds held by a third-party intermediary or accommodator, and defer the capital gains tax by buying a qualifying replacement property of equal or greater cost with those funds.
This is called a Starker delayed tax-deferred exchange. You must designate the replacement property within 45 days after the sale and complete the acquisition within 180 days.
DEAR BOB: My grandfather died last year in California. I am the executor of his estate. My grandmother is in a convalescent home with Alzheimer's and is of no help clearing up his estate. I'm not even sure she knows my grandfather died.
Their house needs to be sold, along with other properties. The attorney handling the estate says my grandmother got a new stepped-up basis after my grandfather's death, so there will be very little capital gains tax to pay. This sounds too good to be true. Is it?--Chuck S.
DEAR CHUCK: Yes. If your grandmother and late grandfather held title to their real estate as community property, or community funds were used to buy and maintain them for many years, then your grandmother gets a new basis stepped up to market value on the entire property. You and the estate's attorney should consult a tax adviser.
To illustrate, presuming the house was community property and your grandmother inherited your grandfather's half, if they paid $50,000 for the house, but it was worth $200,000 when your grandfather died, her new stepped-up basis is $200,000.
However, if the house was not community property, your grandmother would get a new $100,000 stepped-up basis on the inherited half, plus her old $25,000 half basis, for a new basis of $125,000. If she sells the house for $200,000, $75,000 is taxable gain if the house was not community property.
By the way, if your grandmother is incompetent, how do you plan to sell the house? She needs a court-appointed conservator or guardian. That cost and delay could have been avoided if your grandparents had had a living trust since, presumably, you would have been the alternate trustee.
DEAR BOB: Recently, I refinanced my 30-year home mortgage. I would like to accelerate my loan payoff by making biweekly payments rather than the customary monthly payment. The amount of each biweekly payment would be half of my monthly payment. But my lender tells me their computer is not equipped to handle biweekly payments.
Instead, they use the services of a company called Equity Accelerator, which would charge me a one-time fee of $295 plus a monthly fee of $5.42. I do not think I should be penalized because my lender's system can't handle biweekly mortgage payments. What are your views on this?
DEAR JANIS: Ironically, on the same day I received your letter, I received a letter from the same company offering to convert my mortgage into biweekly payments for the same fees. They included a printout of my "estimated personal benefits statement." Obviously, they received these details from my lender, Norwest Mortgage, the nation's largest home loan originator.
Biweekly mortgage payments, half your current principal and interest payments, equal one additional monthly mortgage payment each year. The result cuts your 30-year mortgage down to about 23 years and saves approximately seven years' interest.
That's quite a savings. However, you can do this yourself without paying Equity Accelerator $295 plus $65.04 each year. Divide your monthly mortgage payment by 12 and add that amount to each monthly payment, clearly marked for credit to your loan's principal.
To illustrate, if $1,200 is your monthly principal and interest payment (exclude any escrow impounds for taxes and insurance), dividing by 12 results in $100. Add this amount to your regular $1,200 monthly payment, thus accomplishing the same result.
DEAR BOB: My husband and I are work-at-home writers. We now rent a lovely house. But our neighbors are constantly outside working on carpentry, illegal construction and other noisy pursuits. We desperately want to move to a quiet neighborhood.
What is the best way to ensure that we won't move to a noisy neighborhood? Are there places that strictly zone against noise? How do we find them?--Ceci and Peter R.
DEAR CECI AND PETER: You could move to a country house, far away from neighbors and noise. But living in an urban area involves noise from traffic and neighbors. Before buying or renting, spend a few hours checking noise levels on different days at random times.
Most cities and towns allow reasonable noises, but some have strict noise ordinances. However, if you're continually disturbed by a loud noise, such as a barking dog, that the city won't abate, talk with a lawyer about bringing a lawsuit against the offender for maintaining a private nuisance.
If you think you've got it bad, my neighbor loves to sing loudly outdoors off-key. Another neighbor uses his high-pitched leaf blower on Sundays when he knows he won't get caught. Some noises we just have to tolerate.
Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.
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