Q–We took out a 10-year mortgage, which is coming due in March. The lender, a private party, has sent us a notice she wants to be paid in full.
Our problem is we can’t pay. We’ve investigated refinancing, but we don’t have enough equity. How can we force the lender to extend our mortgage for a few years?
A–You can’t force the lender to extend the mortgage. When the balloon payment comes due, the lender is entitled to full payment.
Perhaps you can arrange a face-to-face meeting with your lender to explain the benefits of her continuing to receive monthly payments. I presume you’ve paid on time and haven’t caused any problems.
As a last resort, you should shop around among finance company mortgage lenders. You might be surprised. Perhaps you do have enough equity to get a new mortgage to pay the balloon payment. Although borrowing from finance companies isn’t cheap, it’s better than losing your property by foreclosure.
Q–My father died in November. He had a heart attack at age 46. My mother died a year earlier of cancer. The primary concern is they bought their home about three years ago and “rolled over” their profit from the sale of their previous home.
Does my father’s estate now have to pay tax on that deferred profit? It is about $85,000.
A–Don’t worry. I have good news for you. When a homeowner dies while still owning a principal residence where tax on the profit from a previous home sale was deferred, Uncle Sam completely forgives that tax. Isn’t he nice?
If your late father had sold his house the day before he died, he would owe tax on the $85,000 deferred profit from the previous home sale plus any profit on the sale of the current home. But since he died while still owning that home, the estate has a new tax basis of the home’s market value on the date of death, completely free of any worry about the deferred profit. For further details, please consult your tax adviser.
Q–Before we bought our new home, after moving from out of town, the real estate salesman said the schools were excellent. We have two teenagers. But after we got them enrolled in high school, we discovered only about 70 percent of the graduates go on to college. This compares with over 90 percent at their previous high school.
If we had known about this low percentage, we would have bought a house in the adjoining school district which sends about 85 percent of its high school graduates to college. Can we hold the realty salesman liable to us for damages?
A–No. If the salesman said the schools were excellent, that was an expression of his opinion. Opinions are not actionable in court.
However, if he misled you by misstating a fact, such as saying 90 percent of the high school graduates go to colleges, whereas the truth is only 70 percent do, that is a misrepresentation for which he can be held liable for damages.
Please consult an attorney for details.
Q–The buyers of my home wanted to remodel the kitchen before they took possession and title. The funds were deposited in the bank, along with the buyer’s down payment. Since I had already moved out of the house, I foolishly agreed.
The kitchen remodeling contractor got into a dispute with the wife and she ordered him to get out. That was three weeks ago. The sale was supposed to close by now, but the mortgage lender won’t let the sale close until the contractor is paid. Another remodeling contractor hasn’t been hired by the buyers yet.
What can I do to get the sale closed so I can receive my money?
A–I am shocked you and your real estate agent would let your buyer gain possession of your home before the title transfer. Even worse, I can’t believe you would let the buyer start remodeling the kitchen before the sale was completed. Now you’re in a mess that will be difficult to correct.
I suggest you immediately retain a skilled attorney whose goal should be to get title transferred to your buyer as quickly as possible. The attorney must negotiate to pay the remodeling contractor and the suppliers from the buyer’s funds so a release of the mechanic’s liens can be obtained. You’ll need those releases before title can be insured for the buyers.
Let the buyers complete the remodeling after the title is transferred.
Q–About a year ago I listed my home for sale with a fine Realtor. But she was unable to sell it so I rented the house for income to pay the mortgage and property taxes.
I think the market has now improved so I want to put the house up for sale again. If it sells, although I haven’t lived in the house for about a year, can I use that “rollover residence replacement rule” to defer tax as I have purchased a larger home?
A–Internal Revenue Code 1034 says the home being sold must be your principal residence if it is to qualify for tax deferral when you buy a replacement of equal or greater cost. However, the IRS and several Tax Court decisions have allowed tax deferral when the home owner rented the house temporarily before its sale due to local economic conditions.
Nobody can say for sure if your situation still qualifies for tax deferral since you have not lived in the house for about a year. If the house had been listed for sale during that year, you would have a stronger case for tax deferral. Ask your tax adviser to clarify further.
Q–I own a condominium on Maui that is rented to tenants throughout the year. A Maui rental agency handles the rentals for me and I don’t occupy the condo at all.
Once a year I visit Maui to consult with the agency about necessary upkeep and refurbishing. I usually stay about a week. Is this annual trip tax deductible?
A–Yes. If it is necessary for you to stay a week and you spend most of the time refurbishing the condo, such as buying furniture, cleaning, painting and supervising renovation, then your entire travel expenses are 100 percent tax deductible as “ordinary and necessary” business costs.
However, if you spend most of your time vacationing and sightseeing with very little time spent renovating the condo, then your trip expenses must be apportioned between deductible business costs and non-deductible personal travel expenses. Your tax adviser can give you complete details.
Q–I offered $45,000 below the asking price for a home that had been listed for sale since September. I made my offer the day after Thanksgiving. The seller wasn’t happy but he reluctantly accepted. As a result, we spent our first Christmas in our new home.
Since the seller accepted my first offer, do you think I offered too much?
A–Isn’t that an awful feeling to have your first home purchase offer accepted with no back and forth negotiation? You will never know if you could have bought the home for less.
However, I suspect the seller was thrilled to receive any offer after having the house listed a long time and realizing the Thanksgiving to New Year’s period is the slowest time of the year for home sales.
As long as you felt your offer was fair and the mortgage lender’s appraisal enabled you to get the financing you needed, stop worrying. You probably didn’t pay too much.
Q–Last October we sold our home for a 10 percent down payment. The buyer assumed our existing VA mortgage. We carried back a large second mortgage on an installment sale.
After the sale closed, we went to see our CPA. She says our taxable down payment includes both the buyer’s down payment cash and our VA “excess mortgage” which exceeds our cost basis by about $52,000.
We refinanced our home a few years ago. How can this be? Did our CPA make a mistake?
A–No. Your CPA is correct. An excess mortgage usually arises, as in your situation, where your refinanced mortgage exceeds your adjusted cost basis. At the time of refinancing, no tax was due. However, when you sell the home and the buyer takes over that excess mortgage, the amount by which it exceeds your basis becomes taxable.
For example, suppose your adjusted cost basis is $20,000 since you bought your home many years ago. The house is worth $100,000 and your refinanced mortgage balance is now $72,000. That is a $52,000 “excess mortgage” over your $20,000 basis. If you sold for $100,000 with a $10,000 down payment, the $10,000 plus the $52,000 excess mortgage becomes taxable in the year of home sale.
Q–My parents live on an Iowa farm. Their health is declining. A neighbor has made them a good offer to buy their farm at a large profit. They have decided to accept.
As they are in their 70s, can they use that “over 55 rule” $125,000 tax exemption even though this is a farm sale?
A–Yes. For tax purposes, the sale of a farm is really two sales. Your parents can use their “over 55 rule” $125,000 home sale tax exemption on the profitable sale of the residence.
However, it cannot be used to spare their profit from selling the farm portion from tax. They should consult a tax adviser to apportion the sale price between the residence value and the farm value.
To find out more about the Robert Bruss National Real Estate Newsletter, call 1-800-788-1225.
Real estate law varies from place to place, so be sure to consult the laws of your state and municipality before making decisions on real estate issues.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
