DEAR BENNY: I am looking into refinancing my Texas home from a 5/1 adjustable-rate mortgage to a fixed-rate. During this process my mother stated that she would lend me the $150,000 to pay off my existing loan and I would pay her back at the current market rate for a 30-year fixed. This would provide her a stable investment, and I can forgo the closing costs, paperwork, appraisal, etc., associated with a refi.
What are the legal implications of this transaction? If I pay off my current loan do I assume title? What paperwork do I have to sign with my mom to validate the transaction and where do we file it? She would have to claim the income; can I still write off the interest as I would do with any other home loan? Is this transaction as simple as it sounds? –Craig
DEAR CRAIG: Actually, it’s simpler than it sounds.
First, let me respond to your question about title. You still own the property, even though there is a mortgage with a commercial lender. All the lender has is security — protected by recording the mortgage (or deed on trust) on land records in the county where your property is located. When you pay off that loan, the lender will either arrange to release the lien from land records, or send you the appropriate papers for recording.
I suggest that your mother retain legal counsel — at your expense — to assist her. The current lender needs to be paid off; this is what the attorney will do. The lawyer will also prepare the appropriate legal documents — the promissory note and the deed of trust (or mortgage in some states) — which you will sign and notarize.
Once you start sending your monthly payments to your mother, she will have to declare the interest received as income on her annual income tax return. And so long as the new deed of trust (mortgage) is recorded among land records, you will be able to deduct for tax purposes the interest you have paid her each year.
DEAR BENNY: I live in a large condominium complex, with an outdoor swimming pool. There are occasions when someone sits around the pool smoking. The problem is that when I come up for a breath of air, I get a lungful of smoke, anywhere in the pool. It’s hard to believe smoke travels as far as it does.
I’ve appealed to our board to prohibit smoking in the pool area, or at least for a specified hour. Their response is that the city will not allow such a restriction in the outdoors. Do I have a remedy? –B.H.
DEAR B.H.: In today’s world, it is hard for me to believe that the city does not allow such a restriction. More and more cities are enacting anti-smoking regulations, so the board’s answer is, at best, disingenuous.
More importantly, however, there is what I call "public and private zoning."
This means that while a city may or may not have a particular rule in effect, it does not mean that your condominium board of directors cannot impose such a smoking ban. Unless there is a specific regulation in the city that states "no smoking restrictions may be imposed in public property" — which I seriously doubt — your board has the authority to pass such a rule.
Landlords all over this country have imposed "no smoking" rules in their buildings. More and more condos have enacted similar rules. In fact, some associations are even banning smoking within individual units, which will have to be tested in the courts before it becomes widespread.
I suggest that you ask the board for a legal opinion on whether it can enact such a smoking ban in its common elements.
DEAR BENNY: My aunt and I own about 400 acres in a rural area that we inherited from family. We own it as joint tenants with right of survivorship. We want to sell the land to developers and maximize the amount for the sale but do not know how to begin the process. Do we need to prepare the land in some way? I have friends who had fewer acres and made several millions off the sale of their land to county administrations and private developers. They seem to have been at the right place at the right time to make their sales.
Then my aunt asked about wind farms. From my research, there aren’t any in this area. Is it a good opportunity before many people get into the business? Should we contact the county planning commission? If we do, what do we say? Should we contact the politicians in the area? If so, how should we reach out to them? What can we do to make our land attractive so we can sell it and live comfortably in our future? –Renee
DEAR RENEE: First, this may not be the best time to sell, considering the state of the economy, but it certainly would make sense for you to do your homework. …CONTINUED
Yes, I think it’s a good idea to talk with the county. You want to learn exactly what zoning is applicable to your raw land. Can you build only residential houses there, or can you put a commercial shopping center or even windmills there?
I know very little about wind farms, but have heard several radio ads touting wind farms as an alternative source of energy. I suspect you can learn a lot from searching the Internet.
If you finally decide to sell the land, I suggest you contact a commercial real estate agent to assist you. But be careful and screen the agent (and the brokerage firm) very carefully. Make sure that they fully understand your situation, your needs and the geographic nature of your land.
You also want to retain local counsel to assist you along the way. There will be documents you have to sign, which should be reviewed in advance by your attorney.
Finally, talk with an accountant to determine what you can and cannot do so as to avoid having to pay ordinary income when you sell the property. If you merely sell raw land, you will have to pay capital gains tax on your profit — which is currently 15 percent (plus any applicable state or local tax.) But it you start developing the property, you may be considered a "dealer in inventory," in which case you will be taxed at ordinary income rates, which currently can be in the high 30 percent range.
DEAR BENNY: I owned and lived in a house for six years, and then bought a fixer-upper. I restored the fixer-upper and moved into it. In the meantime, a friend who wanted to buy my first house has rented it from me for nine months while she works on her credit score. She has now been approved for a loan. We plan to close in about three weeks. Will I have to pay the capital gains tax because I rented it to her? –Beth
DEAR BETH: So long as you have owned and lived in your house for a minimum of two years before it is sold, you are eligible for the up-to-$250,000 exclusion of gain (or up to $500,000 if you are married and file a joint tax return). You will have to pay income on your rental, which may be offset by your expenses (mortgage, insurance and taxes for the period of the rental), but unless your profit exceeds the dollar exclusion amounts, you will not have to pay any capital gains tax.
DEAR BENNY: I have purchased an investment property and am looking into property management companies. What are questions I should ask them, and what should I be aware of before hiring a property management company? –Ryan
DEAR RYAN: First, does your state require property managers to be licensed? If so, confirm that the manager you select is properly and currently licensed. Get at least three references, and contact each of them personally. Keep in mind, however, that no one gives bad references.
Visit other properties that the prospective manager has in its portfolio. Get a copy of a sample financial report that the manager uses, and ask how often you as landlord will get such a report. I believe that since most of the rental information is put on computers, you should receive a financial status report on a monthly basis.
What fees will you be charged? Are there any extra charges that will apply, such as postage, travel or telephone/fax?
Finally, get a list in writing as to what services will be performed for your monthly fee, and what services will not be done.
This is a very basic response. If you interview three or four different management companies, you will get a flavor of what they do, how they operate and how much they charge.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@sandbox.inman.com.
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