Q. I am a single man who will soon be buying a beautiful house. My fiance is moving in with me. We will be equally sharing. In 2003 we plan to get married.
How does that $250,000 home sale tax exemption you often discuss apply to us?
A. If both you and your fiance hold title to your principal residence, after you both own and occupy it at least an “aggregate” two out of the five years before its sale, each of you can claim up to $250,000 tax-free home sale profits.
However, if your future wife is not on the home’s title, she doesn’t qualify for tax-free principal residence sale profits until she marries you.
Please feel free to consult your tax adviser for additional details.
Q. My wife and I own two homes. One is our primary residence. The other is our second home. When we had our 2001 income tax returns prepared, our tax adviser said we couldn’t take any tax deductions for our second home because our income is too high. She said we must “suspend” our second home deductions. Is that correct?
A. No. Itemized property taxes and mortgage interest are always fully deductible on your income tax returns for a first and second home. Perhaps your tax preparer thought your second home is a rental property. Please consult a new tax preparer to amend your 2001 tax returns.
Q. In a recent article, you said all a surviving joint tenant must do to clear a property title is record a certified death certificate and an affidavit of survivorship. I neglected to clear my late spouse’s name from my home’s joint tenancy title.
When I went to the title recorder’s office, I was told I must hire an attorney or title company to clear the title. I also want to add my son’s name to the title to my home as a new joint tenant. I have been advised to have his wife sign a release.
A. First things first. To clear your late spouse’s name from the title to your home, in most jurisdictions you must provide a certified copy of the deceased joint tenant’s death certificate and an affidavit of your survivorship to the local recorder of titles. If your husband died in 2002 and his net estate was less than $1 million, no federal estate tax is due.
After title is cleared into your name, you can then add your son’s name to your home as a joint tenant. This is done by executing and recording a quitclaim deed from yourself to yourself and your son as joint tenants. The quitclaim deed must include a legal description of the property, and it must be in recordable form. A local real estate attorney might be needed to assist you.
Q. Recently you had a letter about two unmarried persons who bought a condo together and later split up. I agree with you that taking title and signing on a mortgage with a lover can be very dangerous to one’s credit record. The co-owner who remained living in the property is now frequently late with her mortgage payments, thus hurting the credit of the innocent ex-occupant. Couldn’t he get the mortgage company to release him from liability on that mortgage?
A. No. Mortgage lenders don’t release co-borrowers from mortgage liability without a good reason. It’s called money. As I suggested, the co-borrower who is being harmed can bring a court partition lawsuit against the co-owner occupant to force a property sale and equal division of the sales proceeds.
Q. In 2000, I bought a new house as a rental investment with 10 percent down payment. The lender told me PMI (private mortgage insurance) would be required until the loan-to-value (LTV) was 80 percent. But I have nothing in writing to verify that statement. Attached is a copy of my bank’s recent response to my request to cancel PMI. My current loan-to-value ratio is 76 percent. They now say it must be 65 percent. Is this legal?
A. You should have insisted upon receiving the lender’s 80 percent loan-to-value PMI cancellation rule in writing before accepting that mortgage. Although the letter you enclosed from your bank requires a 65 percent loan-to-value ratio, that is clearly outrageous. Most reasonable lenders will cancel PMI when the LTV reaches 80 percent, based on a new appraisal.
My suggestion is to hire one of your lender’s approved certified appraisers to determine the current market value of the property. Presuming your LTV is less than 80 percent, then you have a strong case to convince your lender to cancel the costly PMI.
Q. My husband and I had a joint living trust. We specified that all our major assets held in the living trust, such as our house, stocks, bonds and bank accounts, would be divided equally among our three adult children when we die.
My husband died about two years ago. Since then, one adult child has become estranged from me. She hates me and won’t let me even visit my only two grandchildren. After I die, I don’t want her to receive anything. But when I tried to change the terms of my so-called “revocable” living trust, my attorney said it became irrevocable after my husband died. Is this correct?
A. Yes. Of course, I have not read your joint living trust, but the usual rule is when one co-trustor dies or becomes unable to manage their personal affairs, the living trust then becomes irrevocable.
If the living trust did not leave everything to you outright as surviving trustor, then you cannot change the living trust provisions. Sorry, I don’t know how you can “disinherit” that daughter whom you don’t want to receive any of your living trust assets when you pass on.
Q. I own real estate worth about $1 million of net equity. As I am 77 and in declining health, I want to deed these properties to my only son who has been very good to me. When I gave him my business about 10 years ago, he insisted putting me on the payroll as a “consultant.” Each month I receive a nice paycheck for, in essence, telling him what a great job he’s doing running my old business. What concerns me is my son doesn’t want me to deed my investment properties and house to him. Wouldn’t we both be better off if I transfer title to him now before I die so probate can be avoided?
A. No. Listen to your smart son. As I often say, “It is better to inherit real estate (and other assets) than to receive them as a gift before death.” Death is the best tax shelter of all.
The reason is, after you die, your son will receive a new “stepped-up basis” for the inherited real estate to market value as of the date of your death. He will save a small fortune in capital gains tax.
As you probably know, current federal law provides a $1 million estate tax exemption. The net result is there will be little or no estate tax to pay when you die. If you want to avoid probate for your real estate and other major assets, transfer them into a revocable living trust now.
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PLEASE NOTE: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611 or e-mail questions to robertjbruss@aol.com.
