DEAR BOB: I own some land purchased in 1943 for $50,000. It is now worth about $600,000. How can I sell it and keep federal and state taxes to a minimum? I have three adult children and two grandchildren. –Sabena M.
DEAR SABENA: There is only one way to fully avoid tax on the sale of property held for investment, such as your land. That method is an Internal Revenue Code 1031 tax-deferred exchange for another investment or business property of equal or greater cost and equity.
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For example, you could trade for one or more rental houses, office building, apartment building, warehouse, shopping center or land. But you cannot make an IRC 1031 trade for a personal residence.
Another alternative would be to make an installment sale to spread out your capital gain tax over as many years as you wish. That means you would receive a cash down payment from the buyer, perhaps 10 percent to 25 percent, and carry back an installment-sale mortgage for the balance of the sales price.
There are many installment-sale advantages, such as creating retirement income for you. Part of each principal payment will be taxed as long-term capital gain and, of course, the interest income is taxed as ordinary income.
If you want to provide for your children and grandchildren, you can specify in your will or living trust they are to receive the installment-sale mortgage after you die. Every time they receive a monthly payment from the land buyer they will silently say “thank you.” For details on tax-deferred-exchange and installment-sale benefits, please consult your tax adviser.
DOES MORTGAGE LENDER GET THE HOUSE WHEN BORROWER DIES?
DEAR BOB: If a homeowner dies before the mortgage is paid off and if there is no insurance money to pay off the mortgage, does the house go to the mortgage company? What happens to the equity? –Paula T.
DEAR PAULA: When a homeowner dies, the property title passes according to the terms of the deceased’s written will or revocable living trust. That heir then usually either takes over the existing mortgage payments or sells the property and pays the mortgage in full.
In other words, the heir benefits from the remaining equity. The mortgage lender does not own the house after the owner dies. The lender is entitled only to the amount of the mortgage balance.
Of course, if the mortgage payments are not kept current by the estate or the heir, then the lender could foreclose for nonpayment. For further details, please consult a local real estate attorney.
NO NEED TO UPDATE OWNER’S TITLE INSURANCE POLICY
DEAR BOB: I am confused about our original owner’s title insurance policy. We paid off our home mortgage in full after owning the house for about 18 years. Do we need to have a new updated title insurance policy issued to us to be sure there are no title clouds after we purchased the property? What if the original title insurance company is no longer in business? –Don M.
DEAR DON: There is usually no need to update your owner’s title insurance policy after paying off your mortgage in full. However, as a courtesy to you as a customer, many title insurance companies will check your title to be certain the mortgage lender properly recorded either a satisfaction of mortgage or a deed of reconveyance.
If your original title insurance company has gone out of business, chances are it merged with another title insurer. Your state insurance commissioner’s office can usually tell you the title insurer that is now responsible for your owner’s title policy, which will be in effect as long as you or your heirs own the property.
A second resource is the American Land Title Association in Washington, D.C. They can usually refer you to the title insurer that took over the insurance obligation on your existing owner’s title insurance policy.
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.
(For more information on Bob Bruss publications, visit his
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