DEAR BENNY: I am confused about paying off our mortgage on our primary home or on a secondary home/rental. My husband is totally against paying off either loan, even though we could pay off at least one of the mortgages. Our home mortgage has 10 years left at 5.25 percent interest and the other is a 30-year at 5.75 percent interest.
One of my girlfriends says you should definitely get your mortgages paid off, and yet another person who has his own business and is in his fifties says he is going to get the longest (30- to 50-year) mortgage he can get on his next home.
I don’t know what to do. I would feel much more secure personally if we had one of the mortgages paid off, especially our primary. I must say though that we may sell in the next couple of years and move our primary home to Florida. This is where the second home is. –Cynthia
DEAR CYNTHIA: You have asked perhaps the most difficult questions in residential real estate: Should I pay off my mortgage? And if so, when?
Some people like to have the comfort of having their home "free and clear" of any debt. Others — like your 50-year-old friend — want a large mortgage so that they can take advantage of the tax benefits.
But there is no easy answer. Personally, I believe in having a mortgage on my home. Why? Because over the years, my home will appreciate in value (notwithstanding the current real estate market). Let’s take this example. If my home currently is worth $300,000, conservatively speaking it will appreciate 3-5 percent per year. And this appreciation will take place regardless of whether I have a mortgage. So instead of paying off my mortgage, why not use that money for some other purpose — whether it is for personal travel, entertainment, or just to have it for that rainy day?
The more equity I have in my house — and assuming that the property will appreciate — the more it is "dead equity."
I know that readers will differ with me, but that’s my opinion. You have to look to your own situation, as everyone has different issues and concerns.
In your case, because you plan to sell your current home in the next few years, I see absolutely no reason to pay off that mortgage. Use that money — if you so choose — to pay down the second home in Florida, which carries a slightly higher interest rate.
And here’s a suggestion: Instead of paying off the mortgage completely, if you can make one additional payment each year, you can reduce a 30-year loan down to approximately 22 years. For example, if your monthly mortgage payment is $2,000, each month add $166.66 (1/12th of the monthly payment) when you send in your check. But make sure that your check — and the coupon — clearly indicates that you are making an extra payment.
DEAR BENNY: We are selling a $620,000 home. As a part of the inspection addendum, the buyers are demanding that we put down a $500 security deposit with the title company, refundable if there is no damage to the home between now and move out. Our home is in superb condition. The refund of our money would be based on the buyer’s subjective opinion, because they included no specifics on how they would determine if we would receive the money back. (They also have asked for every single nit-picky item that the inspector found to be remedied). What are the pitfalls of agreeing to put down this deposit and how do we protect ourselves? –Shelly
DEAR SHELLY: If that’s the only way to save the sale — especially in today’s market — I would go along with their request. You could have an attorney prepare an escrow agreement, spelling out the terms and conditions by which the moneys would be returned, but the legal fee involved would not be worth it.
Put the money in escrow and know in the back of your mind that you probably will never get any of it back.
However, you should insist that the buyer has a walk-through of the house the morning of settlement, to determine the condition of the house. You or your real estate agent should be present to observe.
DEAR BENNY: I understand that a couple is allowed up to $500,000 free from taxes on any profit made in their residence when it is sold. My situation is this: I sold one investment condo and bought another one under the 1031 exchange, and later sold the house I lived in and made the 1031-exchanged condo my home. Do I have to pay the delayed taxes on the 1031 exchange when I sell this condo property? Since it is now my home, and has been for more than five years, if we sell it shouldn’t we get the benefit of the full allowable appreciation of up to $500,000? –Gene
DEAR GENE: Because you have owned and lived in the house for five years, if you are married and file a joint income tax return with your spouse, you are eligible to claim the up-to-$500,000 exclusion of gain.
A couple of years ago, all you had to do was move into the replacement home (which was involved in a 1031 Starker exchange, live there for two years, and then take advantage of this gain exclusion. However, Congress plugged this loophole in 2004. Now, if the home was acquired in connection with a 1031 exchange, and you ultimately opt to treat it as your principal residence, you can take advantage of this exclusion only after you have owned it for a full five years. Section 641 of the American Jobs Creation Act of 2004 has imposed a five-year restriction on this loophole. The new law states: "If a taxpayer acquired property in an exchange in which section 1031 applied, (section 121(d)) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property."
It’s still a good way to avoid having to pay any capital gains tax, so long as you have owned the property for a full five years. You only have to use it as your principal home, however, for two out of the five years before it is sold.
DEAR BENNY: In 2005 I sold an income property. It was handled by a Realtor, experienced in selling investment properties, and his partner, a tax attorney, CPA and 1031 facilitator. The closing statements were never submitted to me for my signature or authorization before the title company made all the disbursements. I have been requesting the file for this escrow for three years, including copies of all the cancelled checks and other documents. The 1031 failed because the properties were not found in the proper time frame. All of these professionals failed their responsibilities. What recourse do I have? Is the title company allowed to disburse funds without the seller’s approval? –D.K.
DEAR D.K.: Why have you waited so long? The transaction took place back in 2005, and you may be prohibited from taking any legal action based on the applicable statute of limitations in your state.
The answer to your question is no; the title company (escrow agent or settlement attorney) cannot disburse any funds it receives without the express written permission of both buyer and seller.
But you were the seller in a 1031 (Starker) exchange. The intermediary was obligated to hold the funds until the earlier of (1) your locating the replacement property, which apparently you were unable to do; or (2) 180 days after the initial settlement (escrow) took place.
What happened to those funds? Because you were unable to complete the Starker exchange, the intermediary was required to release back to you.
My suggestion (although it may be too late) is that you immediately retain legal counsel to assist you.
DEAR BENNY: My partner and I have a very serious decision to make quite soon. We hope you can help us with your knowledge and resources or at least direct us to where we need to continue searching. Can unmarried, co-titled adults on a property, having fulfilled the 24-out-of-60-month occupancy requirement each be eligible for the $250,000 exemption? –Pamela
DEAR PAMELA: The answer is yes. So long as both of your are on title, and have owned and lived in the property for two out of the five years before the property is sold, each of you is entitled to take the up-to-$250,000 exclusion of gain.
For more general information, I suggest that you go to www.irs.gov, click on Publications, and access and print Publication 523, entitled "Selling Your Home." In fact, the Internal Revenue Service has a number of publications on many aspects of real estate, and all are free and worth reading.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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