Reverse mortgages come with responsibilities

Dear Bruce: In your column, you said that once a reverse mortgage is entered into, the homeowner (seller) can live there for the remainder of his life, even after equity is exhausted. That sounds like a good arrangement. What about property taxes? I know that for some seniors, the big threat of homelessness is forgetting to pay them or worse, not having enough income to pay them. Does having a reverse mortgage include some provision for this potential problem? – R.B. (no address given)

Dear R.B.: The taxes, maintenance, insurance and other expenses are the responsibility of the homeowner. If they go into default on these items, in some cases the mortgage can then be called. The person entering into the reverse mortgage must be made aware of the fact that these responsibilities exist. If possible, a responsible family member should oversee that the taxes and insurance are paid in a timely fashion.

Dear Bruce: My mother lives in a house that needs major repair. She wants to sell it and live with my wife and me. If she sells her house, she will realize a gain of about $680,000. Is there any situation that can help her minimize or avoid paying the capital gains, such as transferring ownership to a sibling or buying another home? – C.K., via e-mail

Dear C.K.: Your mom will have a $250,000 exemption on her capital gains tax. In addition, her cost of the home (initial cost paid) plus any legal capital improvements that have been made would be deducted from the gain. The balance is subject to capital gains tax depending on her other income, at a maximum of 15 percent. I know of no other ways that it can be avoided. Of course, if she maintains her home until her death, her estate would pay no capital gains tax.

Dear Bruce: We have a home that we purchased in 1995 for $176,000 and have put about $100,000 into it. Would you believe it’s now easily worth $650,000? There are more expensive homes popping up in the neighborhood, but I am afraid, as before, this southern California real estate bubble will burst. I would like to sell my house, bank whatever I’m able to net, which is of course tax-free, wait until the prices go down and buy a cheaper house. On the other hand, I don’t want to kick myself for getting out too early when I could have made even more profit. What do you think? – D.B. in California

Dear D.B.: You have the same problem that people have with the stock market. When is it time to get out? When is it time to cut your losses? When is it time to take a profit? No one can answer that for you. My father once gave me a piece of advice that I have yet to find fault with, and that is, “Nobody ever went broke taking a profit.” The other homily is, “Bulls make money, bears make money and pigs go to slaughter.” If you are uncomfortable with the stability of the housing market, as many are, I see no problem in taking a very substantial profit and sitting on the cash.

Dear Bruce: We live in a 1,700-square-foot Cape Cod cottage and owe $155,000. It is worth $162,000. We are thinking about selling out and buying a used doublewide mobile home ($30,000) or getting a smaller stick-built home for $100,000. I am 70 and my wife is 65. Our income is $2,500 a month. What should we do? – B.W. (no address given)

Dear B.W.: It seems to me that you are head over heels in mortgage debt for someone your age relative to your income. Your income is $30,000 a year and you owe five times that amount on a mortgage. At your age, I think that is very foolish. Whether you should purchase a mobile home or rent an apartment is another question. I think that you ought to seriously consider selling your home. In essence, you have no equity and it’s very unlikely that you will be building anything in the foreseeable future. Your debt-to-income is out of whack. It’s something that needs to be adjusted.

Dear Bruce: I am 45 and would like to put in a pool, spa and backyard oasis. The balance on my mortgage is $53,000, and the house is worth around $425,000. My house payment is $1,078 monthly at 6.5 percent. We also are putting additional principal on the house and it could be paid off in around three to four years. I have an equity line of credit, and I am wondering if I should use this or take the balance of the house and the price of the pool and get a new 15-year mortgage at 4.5 percent? The equity line of credit is interest-only for 10 years, and at any time I can roll this into a second for a 10-, 15- or 20-year mortgage at the current interest rate. The home equity rate is now 6.5 percent. We have been making mortgage payments for the past 12 years. Thanks for your help. I am looking forward to your answer. – F.S., via e-mail

Dear F.S.: It seems to me that you are making this far more complicated than is necessary. You have a $53,000 mortgage and will have whatever the cost of this major improvement will be. Other things being equal, you could get a reduction in a fixed-rate mortgage of at least a half percent to 1 percent on the current balance, and the lower rate on the new balance, so why not take out a 15-year mortgage? There’s nothing to prevent you from making additional payments. Though I’m not persuaded that this is the best way to go, you have that option if you choose. I’m very suspicious of the 4.5 percent mortgage, however. It sounds to me like this is an adjustable rather than a fixed rate. At this writing, the best fixed-rate interest that I’ve seen is somewhere between 5.5 percent and 5.75 percent. Let’s not turn this into rocket science. You’ve got a good handle on things, and you’ve got substantial equity in your home. I would do it the easy way. There’s no reason to deal in seconds, etc.

Dear Bruce: I’m an 82-year-old widow with one son, 56, and two grandchildren. How should my house deed be worded so as to benefit all? – Reader, in Pennsylvania

Dear Reader: You asked how it should be worded to benefit all, but in what way do you want them to benefit? More than likely, it seems that you don’t need to change the deed at all. You simply decide how your property is to be distributed in your will. That having been said, I would not leave the property to more than one person. If you wish to have the proceeds go to two or more people, I would direct my executor to sell the property and divide the proceeds. There is nothing worse than having two or three people on the same deed get into some kind of legal or personal hassle.

Dear Bruce: I have a question that is bothering me. I don’t agree with my accountant, and I’m hoping that you can help me. I’m trying to sell a realty trust owned by me and my wife. It contains land, rental houses and a commercial building. This was incorporated in 1968. My accountant says if I sell the stock, taxwise it would be better for me. The problem is my basis is very low because I have owned it for 50 years. This situation does not sit right with buyers because they have to use my basis to depreciate their assets, which is lower than a straight sale of the assets. The problem arises (in that) when I have a stock sale, I will pay tax once, and my wife and I will receive the money for the stock. If I have an asset sale, I have to pay tax once for the corporation tax, and then we have to pay a personal tax a second time for my wife and me to get the money. It makes a difference of about $200,000 in the proceeds we will receive. Is this correct, and is there any way around paying Uncle Sam twice? Once is enough, but twice? I would appreciate your input. – D.L. Attleboro, Mass.

Dear D.L.: You’ve described what a lot would call a “rock and a hard spot.” What you’re really saying is you will pay more tax or the buyers will pay more tax. If the buyers have to pay more tax, they will pay less for your interests. That’s the way it is. You say that paying Uncle Sam twice is out of the question. If that’s so, then you are going to have to hang on to this, and maybe the taxes will be kinder if these assets are part of your estate. If you want to make the deal go through, you’re going to have to come to the realization that a certain amount of taxes will be paid, either by you or by the buyer and if it’s the buyer, they’re going to want concessions on the price.

Dear Bruce: I am 60 and my husband is 55. We want to sell our house and buy another one in a retirement community. Because of our ages, we thought we might pay a large down payment and take out a mortgage because of the tax benefits and reinvest what’s left, (the exact amount of what we will be borrowing with the mortgage) in a rental or rentals. When one of us dies, then the survivor sells the rental or rentals and pays off the mortgage, therefore having no house payment. We are leery of the stock market and have always favored property as an investment. We both have monthly incomes, but when the other dies, each of us will have only our own retirement and some Social Security. This is the reason neither of us wants a mortgage payment on our own. What’s your opinion on this strategy? Do you have a better one that makes more financial sense? – D.S., via e-mail

Dear D.S.: I have no problem with your strategy, in general. Whether you should take out a mortgage because of the tax benefits is another matter, and very likely not the wisest move. Investing in real estate is an excellent way to generate income, particularly if you do not favor the stock market. However, people often purchase real estate that does not generate appropriate income. For example, people will spend $100,000 on a single-family home that generates $500 or $600 in rental income per month. This is clearly not enough. That having been said, as long as you are buying in an area where there is a reasonable expectation of maintaining the value or perhaps increasing it, and the income stream justifies the investment, I have no problem with your plan. Rental real estate, no matter how it’s sliced, is a part-time job, and as long as you’re prepared to invest that time and energy, go for it.

Dear Bruce: I am planning to sell my house and will clear $300,000. I am going to move and want to rent for six months or a year to see what shakes out with the housing bubble before purchasing another (less-expensive) house. What do you recommend as the best, safe six-month investment for the money, and what kind of return should I expect? – N.S., Las Vegas, Nev.

Dear N.S.: As soon as anyone puts the words “best, safe and short-term” into the equation, it drastically reduces options. On balance, the difference between a higher earning instrument of a point or so will not make much difference on the six-month period. Given that, Treasury bills might be a very viable option. They are 100 percent safe, pay a reasonable rate of return and have the added quality of being readily converted (at some cost) even in a shorter period of time, should the need arise.

Dear Bruce: We’ve had conflicting advice about paying off our mortgage. We soon will be inheriting $500,000 in stocks, bonds and property. Additional assets in a $300,000 trust will be distributed, not incurring any tax. My wife is retired, in her late 50s, with a modest annuity secured by a $300,000 individual retirement account. I am in my mid-50s and have no real assets except our home, which has a $112,000 balance on the mortgage. We expect to live in our home for some years. Assets will need to be sold to pay the debt. My wife thinks we should pay off the mortgage in two or three years and then reinvest, but I’m concerned about the tax implications. I want to convert some assets for income since I have no pension. This is probably a no-brainer, but we would like your input. – J.W., from Washington.

Dear J.W.: With some quick addition it looks to me like your net worth is a million bucks. I don’t see any food stamps in your future. Whether the mortgage should be paid off is largely a function of what the interest rate is. If it’s a low rate, I would keep it in place. If it’s a high rate, you might consider paying it down. You obliquely referred to debt, which may be in excess of the mortgage, but I have no notion as to what that might be. At your age, my inclination would be to invest the money in a broad-range portfolio. You’re still relatively young people. You might wish to put yourselves on a reasonably modest budget to conserve some of the assets to pay off the debts. Due to the inheritance and your wife’s frugality, you should be in good shape.

Bruce Williams is a national radio talk show host and syndicated columnist.