DEAR BOB: I was told a long time ago if you make one extra home mortgage payment each year on a 30-year fixed-interest-rate loan, it will be paid off in 15 years. If that is not true, how many years will it take off the mortgage by making one extra payment every year? –Geri F.
DEAR GERI: Your information is incorrect. However, depending on the interest rate on your mortgage, making an extra mortgage payment each year (13 payments in a 12-month period) will usually cut the term of your 30-year mortgage down to about 22 years.
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Of course, if you don’t plan to stay in your home that long, then there is little sense in making extra mortgage payments.
This is the same principle behind the biweekly mortgage payments (which I do not recommend). Biweekly mortgages paid every two weeks are the equivalent of making 13 monthly mortgage payments each year.
An easy way to make 13 mortgage payments every year is to divide your monthly principal and interest payment by 12 (not including any property tax or insurance escrow). Then add that amount to each monthly mortgage payment you make, clearly marked “extra principal payment.” The result will be to speed up your mortgage payoff and decrease the total interest paid over the life of the mortgage.
CONVERTING HOME TO RENTAL DEFERS CAPITAL GAIN TAX
DEAR BOB: I have owned and occupied my home since 1973, but I am ready to sell and move into something smaller. My problem, if I sell now, is I will have an enormous capital gain tax. Could I rent out the house for several years, then sell it, and do an Internal Revenue Code 1031 exchange for another property? Would this reduce my huge capital gain tax? –Sara G.
DEAR SARA: I presume “enormous capital gain tax” means your profit will exceed the $250,000 (up to $500,000 for a married couple filing jointly) principal residence sale tax exemption of Internal Revenue Code 121. To qualify, you must have owned and occupied your primary home at least 24 of the last 60 months before its sale.
If you move out and rent the house to tenants, thereby converting it to a rental, then you can make an IRC 1031 tax-deferred exchange for another rental property of equal or greater cost and equity. You will then forfeit your unused $250,000 exemption and you can’t take any cash out of the exchange.
However, after the trade is completed, you could refinance the acquired rental property to produce tax-free cash. But when you eventually sell that rental property, you will owe capital gain tax (unless you then make another IRC 1031 trade up). For details, please consult your tax adviser.
PRESCRIPTIVE EASEMENT MIGHT APPLY TO FENCE IN WRONG LOCATION
DEAR BOB: I have lived in my house for 12 years. On one side of my property there is a concrete wall and chain-link fence that runs the entire length of the lot. I had always thought that was the property line. But I recently learned the true boundary is about 5 feet to my side. In other words, the wall and fence are 5 feet within my neighbor’s side of the lot line. I have heard of “squatter’s rights.” Since I have mowed the grass along my side of my neighbor’s lot, how do I get the property line moved? –Tim P.
DEAR TIM: Squatter’s rights have nothing to do with your situation. That term applies to obtaining title to an entire property by occupying it, such as moving into a vacant house. The legal term for squatter’s rights is gaining title by adverse possession.
If I understand your question correctly, the fence is 5 feet on your neighbor’s side of the true boundary line. Because you have been occupying and using that 5-foot strip of your neighbor’s lot, you may be entitled to gain a permanent prescriptive easement.
The legal requirements for obtaining a prescriptive easement to permanently use part of another’s property include open, notorious (obvious), hostile (without permission) and continuous use for the required number of years in your state. California has the shortest time limit of just five years. Some states require hostile use for 20 or even 30 years.
If you meet the requirements for a permanent prescriptive easement over that 5-foot strip of land, please consult a local real estate attorney. To perfect your claim, you will need to sue your neighbor in a quiet title lawsuit.
However, I must warn you the neighbor’s legal defense will be “permissive use,” thus defeating the hostile use requirement.
SHOULD EX-WIFE BRING A PARTITION LAWSUIT AGAINST EX-HUSBAND?
DEAR BOB: My sister is going through a divorce. She has moved out of the house she shared with her soon-to-be ex-husband. He says he cannot afford to buy out her share of the property. Based on your excellent advice in a previous article, I recommended she file a partition lawsuit to force the sale of the house. I see no other way for her to liberate her share of the equity, which she needs to buy a house or condo to live in. But she is concerned he will have no place to live. However, I don’t see that as her problem. He can take his share of the sales proceeds and buy another home. What do you recommend? –Janet H.
DEAR JANET: You gave your sister good advice. Selling the house seems like the best choice for both parties.
As part of the divorce settlement, your sister’s divorce attorney should ask the judge for a court order to have the house sold and the sales proceeds divided equally between the co-owners.
DEATH IS THE ULTIMATE TAX SHELTER FROM RECAPTURE TAX
DEAR BOB: My husband and I own several rental properties as joint tenants with right of survivorship. Over the years, we have taken depreciation deductions on these properties. If we sell them, I understand the IRS will “recapture” the depreciation and tax us at the special 25 percent tax rate. However, should one of us die, will the survivor receive the deceased spouse’s half without having to pay a depreciation recapture tax? –Merle S.
DEAR MERLE: Yes. Death is the ultimate tax shelter from both capital gains tax and the depreciation recapture tax. The surviving joint tenant will receive a new stepped-up basis for the property. For exact details, please consult your tax adviser.
NO AUTOMATIC RIGHT TO HALF OF SPOUSE’S PROPERTY
DEAR BOB: Three years ago, my mother married a widower. He told her that upon his death she would get 30 percent of the house he received after the death of his previous spouse. The remainder will go to his son and grandson. She is not on the title. Since she lives in California (a community property state), won’t she get either 50 percent or the entire house? –Leslie LeB.
DEAR LESLIE: No. Inherited property is the separate property of its owner, even if that owner is married. Your mother’s husband can leave his separate property by will to whomever he wishes.
Only if community property assets were used to maintain the property, such as making mortgage payments, maintaining it, or making capital improvements from earnings after the marriage, could a spouse acquire a community property interest in a spouse’s separate property. For full details, please consult a California tax adviser or estate planner.
FOREIGN PROPERTY INELIGIBLE FOR TAX-DEFERRED TRADE
DEAR BOB: If we sell our rental property, can we use the Internal Revenue Code 1031 tax-deferred exchange to acquire another rental property in Germany? –Mary P.
DEAR MARY: No. Internal Revenue Code 1031 tax-deferred exchanges only apply to U.S. real estate. For details, please consult your tax adviser.
IS EX-LOVER ENTITLED TO HALF OF CONDO SALES PROCEEDS?
DEAR BOB: Nineteen years ago my live-in boyfriend and I purchased a condominium as tenants in common. He paid the down payment and closing costs. We lived together in the condo for a year before he moved out. After over 15 years without a word from him, he has surfaced and wants me to buy him out or sell the condo. He has never paid a penny toward the condo, not one mortgage payment, tax, condo assessment, improvements, or other expenses even when he lived with me. I stayed in the condo and view it as my home. What is a fair way to determine a return on his investment? –Diana B.
DEAR DIANA: Ask him what he wants. It might be less than you expect. If his number is not acceptable, make him a counteroffer. That’s the way negotiation works. When you reach an agreement, to prevent any misunderstanding or change of mind, then put it in writing signed by both parties.
Bear in mind, however, he can bring a partition lawsuit to force the sale of the condominium under a court order. If he does that, it is up to the judge to decide what is a fair division of the sales price, considering you paid all the payments but he made the down payment. For details, please consult a local real estate attorney.
The new Robert Bruss special report, “How to Buy Fixer-Upper Houses with Little or No Cash for Fun and Fortune,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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