Financial adviser offers odd reverse mortgage advice

DEAR BOB: I began getting Social Security last February.Then in May this year I lost my job. A financial adviser suggests I take areverse mortgage “lump sum” and invest it to supplement my SocialSecurity income. I have no other income and no heirs. My home is worth about$400,000 with a $77, 000 mortgage at 4.25 percent interest, which adjusts by 2percent next year. I love my home and want to stay here as long as possible. Doyou think a reverse mortgage will work for me? –Loral C.

DEAR LORAL: Yes. But I am very worried that so-calledfinancial adviser might have suggested you take a reverse mortgage lump sum sohe can sell you an annuity or other investment to earn himself a large salescommission.

Purchase Bob Bruss reports online.

If you want to receive monthly lifetime income from areverse mortgage to supplement your Social Security income, you can elect thatchoice direct from the reverse mortgage lender. You don’t need that financialadviser to help you.

However, you will need to use $77,000 of your reversemortgage entitlement to pay off your current mortgage. Then you won’t have anymore monthly mortgage payments.

The balance of your reverse mortgage can be taken aslifetime monthly income, a credit line (except in Texas), lump sum or anycombination. More details are in my special report, “The Whole Truth AboutReverse Mortgages for Senior Citizen Homeowners,” available for $5 fromRobert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at


DEAR BOB: I am moving into a house I have rented to tenantsfor several years. I understand that when I sell it, I must pay a 25 percentfederal “recapture tax” on depreciation I have deducted on my taxreturns. Do I become liable for this tax when I move into my house? Or will itbecome due when my heirs or I sell the house? –Ruth B.

DEAR RUTH: Converting your rental property into yourpersonal residence is not a taxable event (because no sale takes place). Theonly time you might owe the 25 percent federal depreciation recapture taxoccurs when you sell a former or current rental property.

To fully avoid the 25 percent depreciation recapture tax,you can either (1) make a tax-deferred Internal Revenue Code 1031 exchange ofone rental property for another qualifying rental property, or (2) die whilestill owning the property on which you deducted depreciation. For details,please consult your tax adviser.


DEAR BOB: The driveway to our house is shared with two otherhouses through an easement. The easement is on our lot. As a result, we pay theproperty tax on it. Are we also responsible for repairs when they becomenecessary? This seems unfair because we don’t derive any greater benefits fromthe driveway than do our neighbors. Should we ask our neighbors to contributeeach month to a maintenance fee? –Heidi P.

DEAR HEIDI: Regardless of who owns the land beneath aneasement, unless there is a written agreement specifying differently, theeasement users are to pay the maintenance cost of the easement. Yes, it wouldbe good to get a written agreement with your fellow easement users. But thatmay cause more problems than it is worth if you try to collect monthly feestoward eventual repairs.

The developer of the three lots should have specified in therecorded easement how repair costs are to be handled. For more details, pleaseconsult a local real estate attorney.


DEAR BOB: My son died recently. I am his sole beneficiary.After probate, I will probably sell his house and purchase two annuities for myremaining two sons. Since I will not be eligible for that $250,000principal-residence sale exemption, will the 15 percent capital gains taxapply? –Mark DeJ.

DEAR MARK: I am sorry to hear about the death of your son.But you probably won’t have to pay much tax when you sell the house youinherited from him.

The $250,000 principal-residence sale tax exemption ofInternal Revenue Code 121 only applies to owner-occupants so you can forgetabout that.

After you receive title to the house from the probate court,your adjusted cost basis will be its market value on the date of your son’sdeath. When you sell the inherited house, you will only owe capital gains taxon any net amount you receiving exceeding this “stepped-up costbasis.”

For example, let’s say the inherited house was worth$300,000 on the day your son died. Let’s also suppose it is located in a risingmarket and, after paying all the selling expenses such as the Realtor’s salescommission, you receive $310,000 net. You will therefore only owe the 15percent federal capital gain tax (plus any applicable state tax) on your$10,000 capital gain in this example. For more details, please consult your taxadviser.


DEAR BOB: Seven years ago, we bought a small beach cottagefor $82,000. The land is now valued at $270,000, and the house is worth$75,000. My husband and I have a retirement plan that includes living in thiscottage for two years before selling so we can walk away with up to $500,000tax-free profit. But over the last two years, huge three-story”cottages” are being built all around us and selling for well above$1 million. My husband thinks we should tear down our existing cottage, build alarger one, live in it for two years, and then sell. Should we do this andwould we have to live in it longer than two years? –Carol H.

DEAR CAROL: Why risk all the inconvenience of constructionto possibly sell for the current value of your property, plus the cost ofconstruction? That makes no sense.

Instead, after living in the cottage for two years, justsell for the value of the property as it is. Let some contractor buy it andbuild a big “cottage” at his risk and inconvenience. Rarely will youearn a big profit in a situation like yours by tearing down the house andbuilding a bigger one before selling.


DEAR BOB: We listed our home for sale at $435,000 with aso-called “flat fee broker” who charged us $1,950. The agreement wasthe home would not be placed in the local MLS (multiple listing service) for 30days during which we or the broker could sell the house. After 30 days, ourlisting would go into the MLS and we would pay 2.5 percent to a buyer’s agentwho represents a buyer. After 90 days, we have received zero purchase offersand only two showings by other agents. The listing agent didn’t hold any tourfor local agents or weekend open houses, and only included our listing twice inhis newspaper ads. We feel he provided zero service for $1,950. When we askedfor a refund, he said he lived up to the terms of the listing contract, but thelocal market is “slow.” Do you think we should sue him in Small ClaimsCourt for a refund? –John R.

DEAR JOHN: There are many excellent discount and flat-feereal estate brokers. But it would have taken a miracle for your home to sellunder the listing circumstances you report.

Especially in today’s “buyer’s market” in mosttowns, since you are not selling a cheap house, you can well afford to pay atypical 5 percent to 6 percent sales commission to a full-service listing agentif you really want to get your home sold.


DEAR BOB: We want to give our house to our son anddaughter-in-law as a wedding present. They have been extremely kind to usduring some rough health situations. The house is worth around $600,000 andthere is a $220,000 mortgage at 5.5 percent interest. They have agreed to takeover the mortgage payments. However, the mortgage has a “due on saleclause.” Our attorney says the lender could call the mortgage due if thelender learns about the sale. Could they lose the house by foreclosure then?–Vance C.

DEAR VANCE: Don’t worry. There won’t be a foreclosure. Ifyour son and daughter-in-law make the monthly mortgage payments on time, thechances are one in a 100 the lender would enforce the due-on-sale clause.

Even if that should happen, however, all the lender usually wantsis (1) a mortgage assumption fee around 1 percent, plus (2) adjusting theinterest rate to market level (around 6.5 percent today). In the rare event thelender insists the mortgage be paid in full, your son and daughter-in-law caneasily refinance that mortgage, which is only about 35 percent loan-to-valueratio.

The new Robert Bruss special report, “Pros and Cons ofToday’s Five Best Real Estate Opportunities,” is now available for $5 fromRobert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2006 Inman News

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