DEAR BOB: I am a loyal reader who should have taken your advice. When my adjustable-rate mortgage was recently “recast” to current interest rates, the unpaid interest was added to the mortgage principal balance. I now owe about 110 percent of my home’s market value. I recently lost my tech job, which paid over $100,000 annually. Do I have any recourse to convince the mortgage lender to do the right thing? –Rick C.
DEAR RICK: You enjoyed the low monthly mortgage payments for a year or two after obtaining that mortgage. When the mortgage terms provided for a “recast” to a higher interest rate and larger monthly payment, the lender added the unpaid interest to your mortgage balance. This is called “negative amortization” because you owe more than you borrowed.
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If you are unable to make the higher mortgage payments, ask your lender if you can sell the house for its current market value as payment in full on the mortgage. This is called a “short sale.” Most lenders will approve a short sale only if you are behind in monthly mortgage payments with little hope for catching up.
You should be aware if the lender approves a “short sale,” after the house sells you will receive an IRS Form 1099 from the lender showing the amount of unpaid, forgiven mortgage debt. This debt relief is taxable income to you.
For example, if you owe $200,000 but the mortgage lender approves a $180,000 short sale, your 1099 form will show $20,000 taxable income to you. For more details, please consult your tax adviser.
INDIVIDUAL CAN’T PLACE A LIEN WITH THE CREDIT BUREAUS
DEAR BOB: Back in 1999 my husband and I won a $130,000 judgment in an assault case. In 2006 we located the defendant and his wife living in Las Vegas. We placed a foreign judgment lien on his home. He then filed bankruptcy to have the lien discharged. But the judge refused to remove the lien and the bankruptcy case was dismissed. How can judgment creditors like us go about placing the lien with the three major credit bureaus? –Clare C.
DEAR CLARE: An individual can’t place a lien with the credit bureaus. If your judgment lien was properly recorded in Las Vegas against the defendant-debtor, and any other place where the debtor owns real estate, eventually he will try to sell that property.
Then your judgment will have to be paid so he can deliver marketable title to the buyer. For more details, please consult a real estate attorney where the debtor owns real estate.
ADD HOME-IMPROVEMENT COST TO YOUR HOME’S BASIS
DEAR BOB: Please settle an argument I have with coworkers. If I keep receipts of my home-improvement costs, can I use them to increase the cost basis of my house and then take the $250,000 tax exemption on top of that? –Steve P.
DEAR STEVE: Yes. The adjusted cost basis for your home is its original purchase price, plus most closing costs, which were not tax deductible in the year of purchase, plus the cost of capital improvements added during your ownership, minus any depreciation you deducted for business use of the residence, such as for a home office.
You will still be entitled to use the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple) if you own and occupy the home at least 24 of the last 60 months before its sale. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Pros and Cons of Investing in Rental Houses and Condominiums,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
