DEAR BOB: I am a mortgage broker. One of my borrowers owns two properties. The first one is his primary residence. The other is a rental house. He intends to refinance and take maximum cash out from the investment property. Since he can’t afford to make mortgage payments on both properties, he plans to default on the rental house by foreclosure. Is this a good or bad idea? What happens to the cash he gets from the refinance? –Julie H.
DEAR JULIE: Can you spell f-r-a-u-d? If you knowingly participate in that fraudulent scheme, as a mortgage lender, you should lose your job and mortgage broker’s license.
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The borrower’s credit will be ruined by the foreclosure and your reputation will be badly tarnished for participating because you knew he planned to default.
Depending on the type of loan, especially FHA and VA, and the state where the property is located, the borrower could be liable to the mortgage lender for any deficiency judgment if the lender suffers a net loss from the foreclosure. I suggest you stay far, far away from that dishonest borrower who has no intent of repaying the loan.
BORROWING ON A LIFE ESTATE IS VIRTUALLY IMPOSSIBLE
DEAR BOB: Twenty-one years ago I was willed a “life estate” in a two-family home where I live in one unit. I am responsible for payment of the property taxes, repairs and insurance. Now I am 79 years old, on a limited income, but in very good health. There are some costly repairs to be made to the building. Can I borrow $25,000 secured by the property, which is worth about $400,000? The property taxes are so high now I had to cancel the property insurance. The lawyer-executor for the estate died four years ago. The two remaindermen live out of state and are in poor health. What can I do? –Gloria S.
DEAR GLORIA: If you have good credit, you might be able to obtain a $25,000 unsecured personal loan at your bank to pay for those repairs. However, since you don’t own the property, you can’t obtain a regular mortgage or a reverse mortgage.
I am not aware of any lender who will make a loan secured by a life estate. The reason is there is no way to foreclose on a life estate when you die or fail to make the payments.
If the two remainder persons discover you have let the fire insurance policy lapse, they could terminate your life estate because failure to insure is “waste” of the property. Should the building be damaged by fire, you would be liable for the repair costs but you are probably “judgment proof” without any assets.
SALE OF PRINCIPAL RESIDENCE AND RENTAL PROPERTY IS REALLY TWO SALES
DEAR BOB: I own 14 acres with two houses on the property. One is my principal residence. The other is a rental house. I have owned the property about 40 years and have lived in my residence for 12 years. A CPA told me the land and both houses qualify for the $250,000 principal-residence-sale tax exemption. But the IRS says my profit on the sale of the rental house will be taxable. Who is right? –Ronald M.
DEAR RONALD: The IRS is correct. Presuming both houses are on one lot or parcel, you will be making one sale with two different tax results.
Your profit from the sale of your principal residence and a reasonable amount of adjoining land qualifies for the Internal Revenue Code 121 principal-residence-sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return). That presumes you owned and occupied it as your primary home at least 24 of the last 60 months before its sale.
However, your profit on the sale of the rental house will be taxable as a long-term capital gain. For tax purposes, a professional appraiser can allocate the sales price between the amount received for the principal residence and the rental house. I suggest you consult a new tax adviser because that CPA gave you incorrect information.
The new Robert Bruss special report, “Everything You Need to Know About Reverse Mortgage Pros and Cons for Senior Citizen Homeowners,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 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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