Seller carryback mortgage ripe with benefits

DEAR BOB: What is a seller carryback mortgage, which youoften mention? –Mary J.

DEAR MARY: When you buy a property and the seller financesall or part of your purchase price, acting like a mortgage lender, that iscalled a seller carryback mortgage.

Purchase Bob Bruss reports online.

Sellers often carry back mortgages to facilitate the sale,earn interest income on the unpaid balance, and create a safe investmentsecured by a mortgage or deed of trust on the property they just sold.

Many retirees especially enjoy carrying back mortgages fortheir buyers because the retiree then has safe retirement income at a higherinterest rate than usually can be earned elsewhere.

In today’s home sales market, for example, if you buy afree-and-clear house with a 10 percent cash down payment, the seller could thencarry back a 90 percent first mortgage. If you offer the seller a 6 percentinterest rate, that’s a “good deal” for both you and the seller.

Should you default, the seller can then foreclose and eitherget paid in full by a bidder at the foreclosure sale or, if there are nobidders, get the property back to sell for a second profit.


DEAR BOB: I own rental property that I plan to sell, as Iwill be retiring in the next year or two. I would like to use the profits tohelp my son buy a home. Most likely I will need to be part of the purchase ashe will need my credit and income to qualify for a mortgage. What is the bestway to avoid tax on my rental property sale? –Evelyn E.

DEAR EVELYN: The only way to avoid tax on the sale of yourrental property is to make an Internal Revenue Code 1031 tax-deferred exchangefor another business or rental property of equal cost and equity. That doesn’tsound like what you want to do.

If you sell the rental property to raise cash to help yourson buy a home, your capital gain will be taxed at the federal 15 percent taxmaximum tax rate, plus the special 25 percent depreciation recapture tax rate,plus applicable state tax.

What you do with the cash, such as helping your son buy ahome, is irrelevant. For details, please consult your tax adviser.


DEAR BOB: I am a 74-year-old homeowner, still workingbecause I can’t afford to retire. Also, I enjoy my job. My house is free andclear. But it needs a new roof, and I need a new car. My banker suggests a homeequity loan. However, a co-worker suggests a reverse mortgage. What do yousuggest? –Herb W.

DEAR HERB: If you take out a home equity loan, you will havemonthly payments to make. However, if you instead obtain a reverse mortgage anduse part of your entitlement for a new roof and a new car, you won’t have anyrepayments as long as you continue living in your home.

When you decide to retire, you can use the balance of yourreverse mortgage for lifetime monthly income, a credit line (except in Texas),lump sums as you need cash, or any combination. I suggest you listen to yourfriend and investigate a reverse mortgage.

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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