Q-When I moved to this area four years ago, I rented out the condominium where I formerly lived. Now I want to own a home closer to where I work. I realize I can`t sell the rental condo and buy a personal residence without paying tax on my sale profit. But I was told I can make an exchange. How would this work?
A-Your situation is perfect for a Starker ”delayed” tax-deferred exchange, as authorized by the Internal Revenue Code.
The first step is to sell the condo. Perhaps your tenants would like to buy it. When you find a buyer, be sure to accept the purchase offer subject to an IRC 1031(a)(3) tax-deferred delayed exchange. That means you can close the sale, but the sale proceeds must be held by a third-party intermediary, such as a bank trust department.
Then you have 45 days to designate a rental property of equal or greater cost and equity, to be acquired within 180 days after the sale of your rental condominium. Although the acquired property must be rented to tenants, you can later convert it into your personal residence, if you so desire. For further details, please consult a real estate or tax attorney.
Prepayment savings
Q-Please explain how extra monthly principal payments work to save interest on an amortized mortgage.
A-When you obtained your home loan, the lender probably gave you a loan amortization schedule. It showed how, in the early years, most of your monthly payments go to pay the interest on your loan and only a small part reduces the principal balance. But as the years go by, the interest portion of each payment decreases and the principal balance reduces faster each month.
If you make an extra principal payment each month, such as $100, the interest for each future monthly payment will drop more than is indicated in your amortization schedule. In other words, that amortization schedule only applies if you make the regular minimum payment each month. When you add an extra principal payment each month, you cut down the life of the mortgage. If you keep doing this every month, perhaps reducing your 30-year mortgage to 20 years or less, you will save thousands of interest dollars.
Mortgage types
Q-My family is about to buy our first home and we are shopping for a mortgage. Our ratio of household income to mortgage payments exceeds 28 percent and 36 percent for all debt. We need a mortgage of about $160,000. I hope to find an FHA-insured mortgage. Also, I understand there are secondary mortgage companies. Please tell us the differences between FHA, conventional and Fannie Mae loans.
A-If you need a $160,000 mortgage, forget about FHA because FHA maximums are far below that for your area. But a conventional mortgage from a local bank, S&L or mortgage broker would be ideal. Because your monthly mortgage payment will exceed 28 percent of your gross family income, you don`t meet the tough Fannie Mae-Freddie Mac guidelines (although waivers are allowed if you have a good credit history).
In your situation, I suggest you consider an adjustable rate mortgage
(ARM). Normally, I don`t like ARMs, but with an above-average ratio you will find lenders most receptive to your ARM application. By prequalifying for a loan, you can then shop with confidence for a home, knowing you can get the mortgage you need.
Rental depreciation
Q-I bought my house in 1987. It has appreciated in market value since then and I am in the process of refinancing. But I will be moving out of the area soon and will probably keep the house as a rental. With the new, low mortgage interest rate, it should have a break-even cash flow. Can I depreciate the current market value or just the price I paid for the house?
A-You can depreciate the price you paid for the house, plus capital improvements added during your ownership (such as a room addition), minus the non-depreciable land value. The current market value is irrelevant. For further details, please consult your tax adviser.
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The new special report ”The Right Way to Shop for the Best Mortgage,”
by Robert J. Bruss, is available for $4 from Tribune Books, 75 E. Amelia St., Orlando, Fla. 32801.
Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
