Adding children to title documents complicates estate

Dear Bruce: We own two homes, one in California and one in Nevada. We would like our California home, valued at $250,000, to eventually pass to our adult daughter. At the present time, she cannot qualify for the $160,000 mortgage balance. My wife and I are presently considering a refinance of the home. Is there some advantage to naming our daughter on the title documents to make the transfer easier at some time in the future? – M.D., via e-mail

Dear M.D.: I see no advantage in putting your daughter on the title documents. This could possibly complicate your estate. If she’s married, it could further complicate things in the event of a divorce. You did not indicate your ages or the state of your health, but the mortgage may be paid before your demise. If not, consider a life insurance policy with your daughter as the beneficiary to retire the balance of the mortgage. As to refinancing, if you are paying a high interest rate, it would make sense to refinance to get a lower rate. Whether you intend to take cash out is yet another matter.

Dear Bruce: I have what may be a simple question regarding my home mortgage. I include an extra $500 to $1,000 towards the principal with every payment I make. Unfortunately, my mortgage company never applies that extra money towards the principal and instead, counts it as a future payment. According to a recent statement, my next payment isn’t due for seven months. Every six months or so I call them and tell them I want it to be applied towards the principal and not a “future” payment. They correct the payments, which lowers my current balance and then my next payment comes due in 30 days. My question is this: Do I have to make this call every six months to save the interest from accumulating or does their method suffice for that purpose? It just seems like there might be a better way of getting all their interest charges even though they have my money. – B.B., Las Vegas

Dear B.B.: Why are you paying off this $500 to $1,000 a month? That is partially a function of the interest rate you are paying. If you have a low-interest mortgage, you are very foolish to pay off the principal early. Why not invest the money elsewhere? If it is a high-interest mortgage then what you are doing would make sense. Where I think you’re having a problem is where you say, “I include.” Rather than including, I would send a different check altogether marked “reduction of principal.” You’re confusing the system and making it difficult for your mortgage servicer. When money comes in, it generally is handled by automated system and, unless it is completely separate from the mortgage payments, it is simply applied toward the current mortgage and then future payments. If you are going to continue to do this, my suggestion is that you do as I have described and always put the extra payment on a separate check.

Dear Bruce: I’m a Lutheran minister getting ready to retire. A couple of months ago you mentioned that “wasting money on rent” is not always accurate. I am 63 and have never lived in my own home; my parishioners provided my dwellings. Frankly, I’m tired of mowing lawns, raking leaves and trimming hedges. Maybe after a year or two in an apartment I may feel differently, but right now I’d like to know if the same argument applies to me about renting versus buying, as it did to the young person, and investing the difference? – Reader, South Dakota

Dear Reader: The argument applies at any age, depending upon your likes, dislikes and needs. If you can get by on a small amount of space and do not want to have the responsibility of home ownership, there is nothing wrong with renting. You might consider investing in a condominium. The complex’s association handles maintenance. Put aside this canard that renting is wasting money. You are receiving a value for your rent (i.e. shelter) and your capital can be invested elsewhere – not a bad deal in today’s world.

Dear Bruce: We’re a married couple who have owned a home for a year. Before this, I was married and had a son. I own a nearby home that we still use. At some time in the future we may rent out my first home. If I sold that home, would there be any capital gains? – “A,” in Florida

Dear “A”: I can think of no circumstance that the home can be sold without a capital gains tax, other than selling it at a price where no taxes are assessed. Whether this property has depreciated is another matter. On balance, an accountant will have to sit down with you and figure out what the taxes will be. It’s very difficult for me to come up with a circumstance where some tax will not be due. This is not a primary home of any of the individuals involved and that is the fulcrum.

Dear Bruce: I recently accepted a job with another company that will require my wife and me to transfer to another state. We have our house up for sale and are asking $150,000. We know it’s worth this much, but the best offer that we have received is only $120,000. I don’t want to sell it for this price. We are considering renting out the house until the market firms up. We can get $1,000 a month in rent. We would use an agency to do background and credit checks on possible renters. What do you think? – C.B., via e-mail

Dear C.B.: First of all, your house is not “worth” $150,000. If the highest bid you were able to get on the house is $120,000, then that is what it’s “worth.” A property is worth only that amount of money that a willing and able buyer is prepared to pay and a willing and able seller can deliver. While you may feel it’s worth $150,000, it’s only worth that amount when someone offers that to you. On a $120,000 home, $1,000 a month is nowhere near ample. A minimum of $1,000 a month is where you should start and maybe even more, if you do use an agency, which will want a piece of that pie. If you do decide to rent out your house, long-distance property rental for amateurs is a very difficult thing to do. Using an agency would certainly take some of the headache away. The only other problem that I see is at the end of the lease period. What if these folks decide to move on? Now you are stuck with long-distance homeownership. If I were you, I would take the highest offer and get on with my life.

Dear Bruce: I live in a facility which officials there assured me was strictly independent living. My resident lease states that unequivocally. After the first year they went to assisted living, which did not change things much, although the resident lease still stated “independent living” only. Now in the second year, there are a lot of very disabled residents, both physically and mentally. I believe that they broke their agreement with me and have forced me to move out of this environment. I think that the least they could do is pay for my move. Am I being unreasonable? I would truly appreciate your take on this. If they stuck to their original agreement, I would not have any cause to move. – M.B., Tarpon Springs, Fla.

Dear M.B.: I am completely on your side. There’s a huge difference between independent living and what they’re offering today. They may have come to a conclusion that this is what they must offer to stay in business. However, they should also advise folks such as yourself who do not require or care to live in that type of environment that this is happening and give you ample time to make a decision to move on. Any expense involved in the move should be theirs. Feel free to take this answer from me to them.

Dear Bruce: You’ve often said that it’s cheaper to rent than to own, but I just don’t get it. Can you try to explain it to me one more time? – Reader in Florida

Dear Reader: Many times one can rent a single-family home for considerably less than one can purchase it. By the time you add your expenses – principal, interest, taxes, insurance, utilities, maintenance and all the other things that are akin to homeownership – that same home can be rented oftentimes for hundreds of dollars a month less, net. If you had the discipline to invest the difference every month, at the end of a five-year period you most likely will have more money in that investment account than you would have in equity in the home if you had purchased it. The facts seem to be that in most parts of the country, single-family homes rent for less than it costs to own. I can’t give you a reason why but that is a fact.

Dear Bruce: My wife and I sold a rental home that we have owned for 11 years. We have $26,000 in pretax capital gains to invest. I am advocating that we perhaps look for another property to buy in order to avoid capital gains tax. Otherwise, I’m at a loss. The banks are paying little to no interest, but I feel the need to try and make the money grow. We already own another rental home and own a home in Sweden. What do you suggest? – P.M., via e-mail

Dear P.M.: I’m assuming that you are a U.S. citizen or at least the properties are located in the United States other than your own home. That being the assumption, check with your tax adviser. If you are looking for another property you might want to make certain that you do it under a 1031 exchange to avoid the capital gains tax for a time. You realize that you are only putting off the inevitable. If you’ve been successful in rentals (I’m not even sure of that since in 11 years you’ve only realized a profit of $26,000) and this is an area that you want to pursue, then by all means be certain that the 1031 insulator or something similar is used. You should understand that time is very much your enemy. You must proceed with alacrity.