Is tax due on ‘cash-out’ mortgage refinance?

DEAR BOB: We just refinanced our condo, receiving part ofour equity in cash. Is the money we received taxable? –Sheila D.

DEAR SHEILA: No. When you refinance your mortgage and takeout all or part of your home equity in cash (called a “cash-outrefinance”) you owe zero tax on that cash. It is tax-free for you to spendas you wish.

Purchase Bob Bruss reports online.

There is a very good reason. Borrowed money must eventuallybe repaid, whether you repay it over the life of the mortgage, such as 20 or 30years, or when you sell the condo and payoff mortgage balance in full.

If your new refinanced mortgage exceeds your home’s adjustedcost basis (as it probably does), such as a $200,000 mortgage on a condo forwhich you paid $150,000 to purchase several years ago, that is a “mortgagein excess of basis.” There is no tax on such an “excessmortgage” at the time of refinancing.

However, when you sell your condo, remember you have anexcess mortgage when that $50,000 cash-out money becomes part of your resaleprofit (but you already received that $50,000 in this example when yourefinanced).

Of course, when you sell and if your principal residencecapital gain sale profit is less than $250,000 (less than $500,000 for aqualified married couple filing a joint tax return in the year of home sale),thanks to Internal Revenue Code 121 you owe no capital gain tax if you ownedand occupied the home at least 24 of the last 60 months before its sale.

That exemption includes any excess mortgage “cashout” amount. For full details, please consult your tax adviser.

NO DEFENSE TO A PARTITION LAWSUIT

DEAR BOB: Is there any defense for a partition lawsuit whereone co-owner wants to force a property sale but the other co-owner doesn’t wantto sell? –Madison T.

DEAR MADISON: It is up to the trial court judge to grant ordeny a real estate partition lawsuit where one co-owner seeks a forced sale ofthe property but the other co-owner(s) doesn’t want to sell.

My experience has been 95 percent of all partition lawsuitsare granted by the court to force the sale of the property, with the saleproceeds divided among the co-owners. For details on your situation, pleaseconsult a local real estate attorney.

NO TITLE DEFECT PROTECTION UNLESS YOU HAVE OWNER’S TITLEINSURANCE

DEAR BOB: I bought a vacant lot that was supposed to be5,000 square feet. But the title insurance company didn’t report an easementfor about 1,600 square feet. As a result, I can’t build the house I want unlessthe house size is reduced. Can I get payment from the title insurance companyfor my problems and losses? –Sergio D.

DEAR SERGIO: If you purchased an owner’s title insurancepolicy, the title insurer must either pay to get the undisclosed recordedeasement removed, or pay you the diminished market value of your property withthe recorded easement, which the negligent title insurer failed to disclose toyou.

Of course, if you didn’t buy an owner’s title insurance policy,even if you paid for a mortgage lender’s title policy, you have no claimagainst the title insurer (although the mortgage lender has a valid claim underthe lender’s title policy).

However, if the easement was not properly recorded orobvious from a visual inspection, such as a power line easement, then it is nota valid easement and the title insurer has no liability. Consultation with alocal real estate attorney is advised to determine your legal rights againstthe title insurer.

JOINT VENTURE REQUIRES CAREFUL LEGAL DOCUMENTATION

DEAR BOB: I am considering buying a property in myneighborhood that needs rehab. The seller wants to sell for around $200,000.But I want to pay only about $100,000. I know the ARV will be well over$700,000. Can I ask the seller to add me to the title so I can obtain financingto pay the rehab costs, and then split the profits? –Lisa M.

DEAR LISA: I presume by ARV you mean “after renovationvalue,” or something like that.

If the owner agrees to add you to the title so you canobtain financing for renovations, you need to consult a real estate attorney toprepare a joint venture or a partnership agreement.

Few owners would be willing to do that, as the legalcomplications could be endless, especially if you try to establish a very low$100,000 basis. You would probably be better off acquiring the title and thenobtaining an improvement loan to pay for the rehabilitation.

GET TAX ADVICE BEFORE ADDING NAME TO MOM’S HOME TITLE

DEAR BOB: I would like to put my name on the title of thehome I share with my mother. We are about to sell it. I want to know what Ineed to do to make that happen. I share in the upkeep and the payments. I wastold having my name on the title is the best way to assure funds when the saleis completed. Is this true? –Alicia H.

DEAR ALICIA: If your name was not on the title when you paidthe mortgage interest and property tax payments, you are not entitled to claimany itemized tax deductions for those expenses.

If your mother gifts you a partial interest in her house,perhaps 50 percent, that makes you obligated for 50 percent of the capitalgains tax. The reason is when you receive a property gift, you take over thedonor’s (presumably low) adjusted cost basis for that gift.

Even if the house has been your principal residence at least24 of the last 60 months before its sale, you can’t yet qualify for the$250,000 principal residence tax exemption of Internal Revenue Code 121. Thereason is your name was not yet on the title at least 24 months before the homesale.

Your mother’s gift to you of part of the house could be amajor mistake for both of you. Before she gives you a quitclaim deed for anyinterest in her house, you should both consult your tax adviser to discuss allthe details, especially the disadvantages.

WHAT TO DO ABOUT NEIGHBOR’S TREE BREAKING UP A WALL

DEAR BOB: A tree that belongs to my neighbor is next to ourcommon wall. The roots are breaking up the wall. The tree owner refuses to takeany action. What can I do? –Steve W.

DEAR STEVE: By “common wall” I presume you mean aconcrete wall, not just a wood fence.

Legally, you can cut the tree roots back to the propertyline. However, be very careful not to kill the neighbor’s tree. If you do so,you can be held liable to the neighbor for the market value of the tree youkilled.

Another approach would be to sue your neighbor for a privatenuisance abatement. You could ask the local court for an order to force theneighbor to cut the tree roots back to the property boundary. Please consult alocal real estate attorney to discuss your legal choices.

WHAT RECOURSE FOR AN UNDISCLOSED “MAINTENANCE”ESCROW?

DEAR BOB: I own a property on which the maintenance is paidfrom escrow by my bank. They charged some type of “assessment” of anadditional fee in September 2005. Neither my bank nor I was notified of the$190 original fee. Now they have imposed late charges and I received noticefrom an attorney saying I must pay over $1,600. They put a lien on my propertytitle. Is this legal to notify me over a year later? –Lourdes B.

DEAR LOURDES: Who are “they”? I have never heardof an escrow for “maintenance.” The two most common types of mortgageescrows are for property tax and fire insurance payments when they come due.

Please consult a local real estate attorney to review theescrow agreement. If the $190 charge was for some type of tax, such as a civicspecial assessment for street paving, the escrow holder should have beennotified and should have paid the additional charge from your escrow account.

Perhaps your lender is trying to get you to pay the extrafees for the lender’s negligence failing to pay a special assessment tax.Lenders do this all too frequently, hoping you won’t notice the extra latecharges due to the lender’s negligence.

The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant delivery at www.BobBruss.com. 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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