DEAR BOB: Last year, my wife and I loaned our daughter andson-in-law the money they needed to buy their first home. We weren’t earningmuch on the money and they offered to pay us 5 percent interest. It was a gooddeal for them and a good deal for us. They faithfully pay us the monthlyinterest and principal. However, when they had their income taxes prepared,their tax adviser told them that the approximately $32,000 of interest theypaid us in 2005 is not tax-deductible because it is an unsecured loan, which isnot recorded against their title. Please tell us this isn’t true. –Gregg G.
DEAR GREGG: Their tax adviser is correct. For your daughterand son-in-law to deduct the interest payments paid to you as itemized homemortgage interest, the loan obligation must be secured by a recorded mortgageor deed of trust against their home.
Purchase Bob Bruss reports online.
Although you and your wife must report on your tax returnsthe interest income received, the borrowers are not entitled to deduct it ashome mortgage interest because the loan isn’t secured by their residence.However, this can be corrected for 2006 by their signing and recording amortgage or deed of trust to secure the promissory note they gave to you.
SHOULD A 5.5 PERCENT HOME LOAN BE PAID OFF EARLY?
DEAR BOB: About a year ago, my husband and I refinanced our$375,000 home mortgage with a 5.5 percent interest rate loan. Now we are in afinancial position to pay off our mortgage in full. But our CPA son-in-lawadvises against doing so. He says we need every tax deduction we can get.However, I would like to be free of the monthly mortgage payments. What do youadvise? –Amy T.
DEAR AMY: Listen to your smart son-in-law. Unless you are ina very low income tax bracket, your after-tax mortgage interest rate is onlyabout 3.5 percent. That’s a true bargain.
Surely you can find a safe place to invest that $375,000 toearn more than 3.5 percent interest. Then you will have that money availablefor an emergency or investment opportunity.
Another consideration is to check if your mortgage has aprepayment penalty. If it does, that settles the matter in favor of not payingoff your mortgage.
HOW LONG MUST HOME BE OWNED TO QUALIFY FOR $500,000 TAXBREAK?
DEAR BOB: My friend and I have a disagreement about InternalRevenue Code 121. How long must my wife and I own our primary home to avoid taxon our capital gain up to $500,000? We purchased our home in July 2003. Can wesell it now and avoid tax on the gain up to $500,000? –Richard W.
DEAR RICHARD: To qualify for up to $500,000 tax-freeprincipal residence sale capital gains, you and your wife must own and occupyyour home at least 24 of the 60 months before its sale and file a joint taxreturn in the year of sale.
However, if you acquired the residence in an InternalRevenue Code 1031 tax-deferred exchange, you must own it at least 60 months toqualify with the same 24-month occupancy requirement. For full details, pleaseconsult your tax adviser.
The new Robert Bruss special report, “How to Sell YourHouse or Condo for Top Dollar With or Without a Real Estate Agent,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News<