DEAR BOB: I just had a very bad experience with my home mortgage company. For the last few years, I have been paying my mortgage on the Internet each month. I always included an extra $100 to $500 principal payment. However, my mortgage was recently sold to a new loan servicer. I was shocked to discover all my extra mortgage principal payments have been credited to my escrow account, which is supposed to pay my property taxes and homeowner’s insurance when they come due. The result is I have several thousand extra dollars in that account. But none of my extra principal payments have reduced my mortgage balance. As I was expecting to save thousands of dollars of interest, what can I do now since my old loan servicer is gone? –Brian Y.
DEAR BRIAN: Internet online mortgage payments are especially dangerous for borrowers because you never know for sure if extra principal payments are being properly credited to reduce your mortgage balance and save interest dollars.
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At this point, it will be a nightmare trying to get your former loan servicer to straighten out the mess. If I were in your situation, I would phone your new loan servicer, explain the problem, and ask that the surplus in your escrow account be credited to reduce your mortgage principal balance.
The result will be to save interest from now on, although you lost out on past interest savings that should have been accruing to you each month.
If you continue making online mortgage payments be sure to check each monthly payment to be certain it is properly credited to your principal and interest, escrow account, and for principal reduction if you make extra principal payments each month.
PRINCIPAL-RESIDENCE TAX BREAK APPLIES TO JUST ONE LOT SALE
DEAR BOB: My wife and I own our home, which is located adjacent to two vacant lots, one on each side of our house. We recently sold one of the lots at a large profit. A friend told me he read in your column that our profit on the lot sale adjoining a principal residence is tax-free. Is this true? Can we also sell the other lot tax-free? –Marilee S.
DEAR MARILEE: Internal Revenue Code 121 says your capital gain from the sale of a lot adjoining your principal residence can be tax-free if you also sell your principal residence within 24 months before or after the lot sale. Of course, that presumes you owned and occupied your principal residence at least 24 of the last 60 months before its sale.
However, this exception for the sale of an adjoining lot only applies to one lot sale. When you sell the lot on the other side of your principal residence, it will be fully taxable as a capital gain.
Of course, if you don’t sell your principal residence within 24 months of the lot sale, then the lot sale profit is taxable. Full details are available from your tax adviser.
LOSS ON SALE OF YOUR HOME IS NOT TAX DEDUCTIBLE
DEAR BOB: We bought our home at the top of the market in early 2005. Now we have to sell due to a divorce and other reasons. After paying the selling costs, if we are lucky we will have a loss of about “only” $50,000. Can we deduct this on our tax returns? –Royce C.
DEAR ROYCE: No. A loss on the sale of your personal residence is not tax deductible. Your tax adviser can provide further details.
The new Robert Bruss special report, “When It’s Smart to Prepay or Refinance Your Mortgage,” 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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