Q-My wife and I are having a friendly argument over whether we should refinance our home mortgage. I say we shouldn’t. She says we should.
Our interest rate is 8.75 percent fixed. We can get a new 30-year, fixed-rate mortgage at 7.75 percent with a one-point loan fee. There are added costs for appraisal, title insurance and a bunch of fees we don’t understand.
Didn’t you say it doesn’t pay to refinance a home loan unless the interest rate will drop by at least 2 percent?
A-Yes. Many years ago, I repeated that foolish 2 percent rule that I learned someplace. But the refinance times and rules have changed.
Listen to your smart wife. You neglected to tell us your mortgage balance-but for illustration, let me presume it is $100,000 and your monthly payment is $786.70. By dropping the interest rate just 1 percent, your monthly payment will decline to $716.41, a $70 per month saving.
However, if you incur about $2,000 of refinance costs (one point loan fee plus appraisal, title insurance and other fees), it will take about 29 months to repay those costs from reduced monthly payments. But after that, you have $70 per month pure savings.
If you plan to keep your home at least 10 years, I recommend you take that refinance offer. The only situation in which I suggest that you not refinance occurs if you plan to sell your home within less than three years. Then refinancing isn’t worth the hassle.
P.S.: Shop around. You might be able to find an even better refinance deal. I’ve seen so-called “no cost” refinances at around 8 percent that are also excellent bargains.
Q-My wife and I were married 28 years before we divorced three years ago. In the divorce, we agreed to split everything equally. I moved, and my ex-wife stayed in the house, which was just sold at a handsome profit after our youngest son graduated from high school. She tells me she will probably buy a condo. I have found a townhouse I want to buy with my sale proceeds.
But my CPA tells me I owe a huge tax on my sale profit, whereas my ex-wife won’t have to pay any profit tax. Neither of us is yet 55. Is this true?
A-Your CPA is correct. It’s not fair, but your ex-wife will get tax deferral on her half of the home-sale profit but you will not.
The problem is Internal Revenue Code 1034, the “rollover residence replacement rule.” This tax law says home sellers who buy a replacement principal residence costing at least as much as the old home within 24 months before or after the sale must defer their profit tax. In divorce situations, this tax law applies individually to each ex-spouse on his or her share of the net sales price.
Your ex-wife is clearly eligible if she buys that replacement principal residence condo by May 1997 and it costs at least as much as her half of the net sales price of the house. However, since you moved out of your former home about three years ago, you no longer qualify for IRC 1034 tax deferral, since it clearly was not your principal residence at the time of the sale.
Q-About three months ago, I quit my job, telling my boss politely to do you know what. I’m now working at home as an independent salesman for the same company that previously employed me. My net income is almost double what I took home as an employee. Now my time is my own. I call on prospects when I want to, but, more importantly, I enjoy my work so much more now that I’m my own boss. Also, I am free to sell competitor’s products, which are often better for my customers.
My question is about home office tax deductions. I set up my office in a spare bedroom. Although I spend little of my work time there, as I am usually “on the road” calling on my customers, can I deduct home office expenses?
A-To qualify for home office tax deductions, your home must be either your principal business location or place used to meet clients. If you were still an employee, your home business use must be “for the convenience of the employer.”
Your home office appears to qualify, since it is your principal business location. Frankly, this is a gray area of tax law, but your home office exclusive business area probably meets the tests.
The tax result is, part of your home expenses for mortgage interest, insurance, taxes and maintenance qualify as deductible business expenses. Some costs may be 100 percent deductible, such as for your business telephone. Your tax adviser can give you complete details.
Q-I invest in single-family rental houses. But in my town I can’t find any houses for sale with seller financing. How do you locate homes where the sellers will finance the sale?
A-Rarely is a house advertised for sale with seller financing. But that doesn’t mean seller-financed homes are not available.
I’ve discovered the best candidates for seller financing are houses being sold by elderly sellers who need increased retirement income. Look for free and clear houses. Do you realize over 50 percent of homes have no mortgages? Just ask your Realtor to look through the local MLS (multiple listing service) book for homes with no or small mortgages.
After you inspect a house without a big mortgage and decide that you want to buy it, make your purchase offer with a 10 percent to 20 percent down payment and a seller carryback mortgage for the balance. Be sure to specify the exact finance terms you want, such as a 25-year mortgage, and the specific monthly payment the seller will receive.
When the seller sees your purchase offer on the kitchen table (where all great family decisions are made) with the amount of monthly payment, that’s the moment seller financing on the house becomes available. The home seller is, by far, your easiest and cheapest source of financing, so you won’t have to beg for a mortgage at the bank.
Q-I recently inherited a house from my father. It was in terrible condition. I have now spent at least $10,000 fixing it up to make it saleable. Can I deduct this expense as a casualty loss?
A-No. Nice try, but your situation does not qualify as a casualty loss tax deduction, which is available only for “sudden, unexpected or unusual” property losses. Examples include losses caused by flood, fire, hurricane, earthquake or landslide. Inheriting a rundown house that needs fixing up doesn’t meet the test.
Q-I’ll bet my wife and I have inspected at least 200 houses. But recently we finally found our dream house. It’s just the right size, is located in an excellent suburb and is on a hilltop with a marvelous view.
The only problem is it’s a bit run-down and is being sold “as is.” The Realtor cautioned us that this means the seller won’t pay for any repairs. We learned the house has been listed for almost a year with three different Realtors. It is vacant and being sold by an estate.
Do you think we should avoid making an offer to buy this house?
A-No. When a home is offered for sale “as is,” it means that the seller and realty agent make no warranties or representations and that the seller won’t pay for any repairs unless specified. But “as is” home sales offer tremendous bargains.
Before making a purchase offer, ask the realty agent to prepare a written comparative market analysis. This form shows recent sales prices of comparable nearby homes. By adding and subtracting for the pros and cons of the home you want to buy as compared to the recent nearby sales, you can arrive at an intelligent offer price.
Be sure your offer contains a financing contingency and a professional inspection contingency. If the inspection reveals undisclosed and unexpected defects, then you can cancel the deal or renegotiate the price.
“As is” home sellers are at a severe disadvantage. Most home buyers want to purchase homes in tip-top “red ribbon deal” condition. When “as is” sellers refuse to pay for repairs, their buyers have no alternative but to reduce the offer price to compensate. My experience has been the sales price is usually reduced far more than the repairs will cost.
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Robert Bruss’ report “How to Earn Your First Profit When Buying the Right Home” is available for $4 from Tribune Media Services, 435 N. Michigan Ave., Room 1408, Chicago, Ill. 60611. Allow six to eight weeks for delivery.
Please note: Real estate laws differ from place to place, so you should check local laws before making decisions on real estate problems. Letters should be addressed to Tribune Media Services, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611.
