DEAR BOB: We just refinanced our condo, receiving part of our equity in cash. Is the money we received taxable? –Sheila D.
DEAR SHEILA: No. When you refinance your mortgage and take out all or part of your home equity in cash (called a “cash-out refinance”) you owe zero tax on that cash. It is tax-free for you to spend as you wish.
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There is a very good reason. Borrowed money must eventually be repaid, whether you repay it over the life of the mortgage, such as 20 or 30 years, or when you sell the condo and payoff mortgage balance in full.
If your new refinanced mortgage exceeds your home’s adjusted cost basis (as it probably does), such as a $200,000 mortgage on a condo for which you paid $150,000 to purchase several years ago, that is a “mortgage in excess of basis.” There is no tax on such an “excess mortgage” at the time of refinancing.
However, when you sell your condo, remember you have an excess mortgage when that $50,000 cash-out money becomes part of your resale profit (but you already received that $50,000 in this example when you refinanced).
Of course, when you sell and if your principal residence capital gain sale profit is less than $250,000 (less than $500,000 for a qualified married couple filing a joint tax return in the year of home sale), thanks to Internal Revenue Code 121 you owe no capital gain tax if you owned and occupied the home at least 24 of the last 60 months before its sale.
That exemption includes any excess mortgage “cash out” amount. For full details, please consult your tax adviser.
NO DEFENSE TO A PARTITION LAWSUIT
DEAR BOB: Is there any defense for a partition lawsuit where one co-owner wants to force a property sale but the other co-owner doesn’t want to sell? –Madison T.
DEAR MADISON: It is up to the trial court judge to grant or deny a real estate partition lawsuit where one co-owner seeks a forced sale of the property but the other co-owner(s) doesn’t want to sell.
My experience has been 95 percent of all partition lawsuits are granted by the court to force the sale of the property, with the sale proceeds divided among the co-owners. For details on your situation, please consult a local real estate attorney.
NO TITLE DEFECT PROTECTION UNLESS YOU HAVE OWNER’S TITLE INSURANCE
DEAR BOB: I bought a vacant lot that was supposed to be 5,000 square feet. But the title insurance company didn’t report an easement for about 1,600 square feet. As a result, I can’t build the house I want unless the house size is reduced. Can I get payment from the title insurance company for my problems and losses? –Sergio D.
DEAR SERGIO: If you purchased an owner’s title insurance policy, the title insurer must either pay to get the undisclosed recorded easement removed, or pay you the diminished market value of your property with the recorded easement, which the negligent title insurer failed to disclose to you.
Of course, if you didn’t buy an owner’s title insurance policy, even if you paid for a mortgage lender’s title policy, you have no claim against the title insurer (although the mortgage lender has a valid claim under the lender’s title policy).
However, if the easement was not properly recorded or obvious from a visual inspection, such as a power line easement, then it is not a valid easement and the title insurer has no liability. Consultation with a local real estate attorney is advised to determine your legal rights against the title insurer.
JOINT VENTURE REQUIRES CAREFUL LEGAL DOCUMENTATION
DEAR BOB: I am considering buying a property in my neighborhood that needs rehab. The seller wants to sell for around $200,000. But I want to pay only about $100,000. I know the ARV will be well over $700,000. Can I ask the seller to add me to the title so I can obtain financing to pay the rehab costs, and then split the profits? –Lisa M.
DEAR LISA: I presume by ARV you mean “after renovation value,” or something like that.
If the owner agrees to add you to the title so you can obtain financing for renovations, you need to consult a real estate attorney to prepare a joint venture or a partnership agreement.
Few owners would be willing to do that, as the legal complications could be endless, especially if you try to establish a very low $100,000 basis. You would probably be better off acquiring the title and then obtaining an improvement loan to pay for the rehabilitation.
GET TAX ADVICE BEFORE ADDING NAME TO MOM’S HOME TITLE
DEAR BOB: I would like to put my name on the title of the home I share with my mother. We are about to sell it. I want to know what I need to do to make that happen. I share in the upkeep and the payments. I was told having my name on the title is the best way to assure funds when the sale is completed. Is this true? –Alicia H.
DEAR ALICIA: If your name was not on the title when you paid the mortgage interest and property tax payments, you are not entitled to claim any itemized tax deductions for those expenses.
If your mother gifts you a partial interest in her house, perhaps 50 percent, that makes you obligated for 50 percent of the capital gains tax. The reason is when you receive a property gift, you take over the donor’s (presumably low) adjusted cost basis for that gift.
Even if the house has been your principal residence at least 24 of the last 60 months before its sale, you can’t yet qualify for the $250,000 principal residence tax exemption of Internal Revenue Code 121. The reason is your name was not yet on the title at least 24 months before the home sale.
Your mother’s gift to you of part of the house could be a major mistake for both of you. Before she gives you a quitclaim deed for any interest in her house, you should both consult your tax adviser to discuss all the details, especially the disadvantages.
WHAT TO DO ABOUT NEIGHBOR’S TREE BREAKING UP A WALL
DEAR BOB: A tree that belongs to my neighbor is next to our common wall. The roots are breaking up the wall. The tree owner refuses to take any action. What can I do? –Steve W.
DEAR STEVE: By “common wall” I presume you mean a concrete wall, not just a wood fence.
Legally, you can cut the tree roots back to the property line. However, be very careful not to kill the neighbor’s tree. If you do so, you can be held liable to the neighbor for the market value of the tree you killed.
Another approach would be to sue your neighbor for a private nuisance abatement. You could ask the local court for an order to force the neighbor to cut the tree roots back to the property boundary. Please consult a local real estate attorney to discuss your legal choices.
WHAT RECOURSE FOR AN UNDISCLOSED “MAINTENANCE” ESCROW?
DEAR BOB: I own a property on which the maintenance is paid from escrow by my bank. They charged some type of “assessment” of an additional fee in September 2005. Neither my bank nor I was notified of the $190 original fee. Now they have imposed late charges and I received notice from an attorney saying I must pay over $1,600. They put a lien on my property title. Is this legal to notify me over a year later? –Lourdes B.
DEAR LOURDES: Who are “they”? I have never heard of an escrow for “maintenance.” The two most common types of mortgage escrows are for property tax and fire insurance payments when they come due.
Please consult a local real estate attorney to review the escrow agreement. If the $190 charge was for some type of tax, such as a civic special assessment for street paving, the escrow holder should have been notified and should have paid the additional charge from your escrow account.
Perhaps your lender is trying to get you to pay the extra fees for the lender’s negligence failing to pay a special assessment tax. Lenders do this all too frequently, hoping you won’t notice the extra late charges due to the lender’s negligence.
The new Robert Bruss special report, “How to Buy Fixer-Upper Houses with Little or No Cash for Fun and Fortune,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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