How to free up ‘dead money’ in home equity

DEAR BOB: My husband and I, ages 74 and 77, respectively,live in our home worth about $900,000 for which we paid $125,000 in 1978. Wehave a remaining mortgage of $44,000 at 5.25 percent interest with $330 monthlypayments. But we dislike sitting on all that “dead money” in our homeequity. We’ve been investigating a reverse mortgage to pull out some of thatmoney to either invest or help our daughter buy a house. However, we are notinterested in additional monthly income. Is a reverse mortgage the way to go?–Darlene MacP.

DEAR DARLENE: My question for you and your husband is:”Are you in reasonably good health and do you plan to stay in your home atleast five years?” If your answer is “yes,” then a reversemortgage could be ideal for your situation.

Purchase Bob Bruss reports online.

Sitting on about $850,000 of “dead money” (alsocalled idle equity) must be frustrating. Giving your daughter the money to buyher house is like an “advance inheritance” if you are certain youwill never need your home equity for personal use.

However, I do not recommend obtaining a reverse mortgage touse the cash for investments because chances of your earning at least as muchas the money costs are very slim.

Because a senior-citizen reverse mortgage must be recordedas a first mortgage, $44,000 of the proceeds will be used to pay off yourcurrent first mortgage.

I suggest you consult a reverse mortgage originator whorepresents FHA, Fannie Mae and Financial Freedom Plan to compare theirofferings. Due to your home’s high market value, the Financial Freedom Planwill probably be best for your situation. You can find reputablereverse-mortgage lenders at


DEAR BOB: I am new to real estate and am interested in”flipping” properties. Where can I learn about getting rid ofpurchased properties and how can I sell them for fast profits? How can I besure I won’t get stuck and have to pay the taxes plus property maintenance?–Daniel R.

DEAR DANIEL: I suggest you study a great new book “FindIt, Fix It, Flip It” by Michael Corbett. Read it twice so you thoroughlyunderstand how to profitably flip houses. It is available in stock or byspecial order at local bookstores, public libraries and


DEAR BOB: Last October we bought a house in Minnesota. Welove the neighborhood. But after moving in, we realized we purchased a”money pit.” The house was offered for sale “as is.” Abouta month after moving in, we had to replace the furnace for $6,000. Recently,our basement was flooded and we had to spend over $10,000 replacing drain tilesand re-drywalling. Our contactor said the existing drywall was not installed tobuilding code, as it had no insulation. The sellers were obviously “houseflippers.” But surely our house inspector should have caught the defectivefurnace. Is the seller liable for the defective drywall they installed? –BrianG.

DEAR BRIAN: When a house is sold “as is” thatdoesn’t excuse the seller from disclosing known home defects. An “asis” sale means the seller must reveal defects but doesn’t have to pay forany repairs.

Your big problem is proving the seller knew about thedefective furnace and the incorrect drywall installation.

If you hired a professional home inspector, hopefully amember of the American Society of Home Inspectors (ASHI), he or she would haveinspected the furnace and discovered any dangerous condition such as a crackedfirebox heat exchanger. Local ASHI inspectors can be located at

The professional inspector’s contract with you, however,probably limits liability so don’t count on holding the inspector liable unlessyou can prove the inspector was negligent and should have discovered thefurnace defect. As for proving the sellers knew about the defective drywall,that is a difficult matter of proving that the seller knew.


DEAR BOB: I added my neighbor and his wife as joint tenantswith right of survivorship to my home, intending to leave it to them when Idie. Will this create a tax problem for them? –Don W.

DEAR DON: Why would you do a crazy thing like that? Yes, itwas a major mistake.

You gave up control over your property in case you need tosell it to pay for your care at the old folks home. If you decide to sell it,they can demand their share of the sales proceeds. Worse, they can refuse tosell and you would have to bring a partition lawsuit to force a sale, with themgetting two-thirds of the sales proceeds.

Still worse, as gift donees, their basis in the propertybecomes your probably very low adjusted cost basis. When they eventually decideto sell, they will owe a substantial capital gains tax.

Even worse, by deeding part of your property away, the localtax assessor will probably reassess the property value, forcing you to pay muchhigher property taxes.

Instead, you could have created a revocable living trust andnamed your neighbors to receive your title after you die. Meanwhile, you wouldmaintain 100 percent control, including the ability to sell if you desire.

More important, after the neighbors inherit your propertythey get a new stepped-up basis to market value on the date of your death andwill owe little or no capital gain tax if they sell shortly thereafter.

Sorry to bring such very bad news. You should have consulteda local real estate or tax attorney before making that major mistake.


DEAR BOB: Here is a silly question for you. You mentioned severaltimes that when a group of individuals owns and occupies a house, such as threeroommates buying a house together, they each will be entitled to a $250,000principal-residence-sale tax exemption if they each meet the24-out-of-last-60-months ownership and occupancy test. Would the same conditionapply if I place my 7-year-old son on the deed to my home? Will each co-ownerthen be entitled to $250,000 tax-free capital gains after living in it for 24of the 60 months before the sale? –Richmon T.

DEAR RICHMON: Yes. But there are major pitfalls of adding aminor’s name to a real estate title.

When you and your wife decide to sell your home, unless yourson is then 18 or older, you must have a court-appointed guardian to representhis interests.

Perhaps that guardian might decide his share of the salesproceeds should be held in trust until he becomes 18 (or 21, or some otherage). I do not recommend doing what you contemplate.

Please remember the rule is minors can receive real estatetitle, but they cannot convey title until they become 18.


DEAR BOB: My life partner and I bought our home as tenantsin common. But I make all the mortgage payments, as I earn most of the income.Can I deduct all the mortgage payments or do they have to be split between thetwo of us? –Michael S.

DEAR MICHAEL: Itemized income tax deductions forprincipal-residence mortgage interest and property taxes depend on who actuallypaid the payments.

If you pay 100 percent of those expenses, only you candeduct those costs you paid. However, if you pay 75 percent and your co-ownerpays 25 percent, then you each get to deduct only the amounts you each paid.For more details, please consult your tax adviser.


DEAR BOB: My boyfriend and I want to buy a piece of landwhere we might wish to someday build a retirement home. We both live in a housemy boyfriend owns. I want to buy half the house from him. Then he would havethe cash to buy the land. Will a reputable bank extend me a mortgage for half ahouse? I have excellent credit and the house is now worth triple what myboyfriend bought it for some years ago? –Lily R.

DEAR LILY: Nice try. But no institutional lender will make amortgage loan secured by half a house.

Both you and your boyfriend must be co-owners holding title.Then a mortgage lender can make a loan secured by the house and signed by bothco-owners.

Work with an experienced mortgage broker to see if it ispossible to accomplish what you and your boyfriend want so you can buy thatland together.

The new Robert Bruss special report, “Five Easy Ways toBuy Your Home and Investment Property for Nothing Down,” is now availablefor $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit cardat 1-800-736-1736 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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