Several factors make renting desirable

Dear Bruce: I am a single parent with income of $60,000 a year. I have a 16-year-old son who will be entering college in the fall. His father will be covering his tuition. I currently live in a townhouse, which I am buying and plan to sell in the next one to two years. I no longer want the responsibility of home ownership (i.e.: grass, shoveling snow, etc.). I want to scale down in size. I am seriously considering renting a nice apartment. Everyone tells me I will be throwing my money away. Most advised that I should buy a two-bedroom condo. I have done research into buying condos and what I have read is more negative than positive. Do you have any suggestions – Marsha, via e-mail

Dear Marsha: You’ve touched upon an area that is so very important and greatly misunderstood. People usually use the expression “you’re throwing money away” when talking about rentals. That’s absolutely untrue. It’s one of the best-kept secrets: Renting is one of the biggest bargains around. For whatever reason, and there are many, rent has not kept up with value. I have talked to people renting houses that are worth $350,000 and they are paying $1,000 a month. You couldn’t possibly own them for anything close to that number. Real estate may go up in value, stagnate or go down in value. I think getting rid of snow shoveling, etc. has a great deal to recommend it. Allowing someone else to have all of that responsibility, as the landlord will, in my opinion makes consummate sense. Congratulations on what will be a new life. Your son will be off and running and you, in turn, will enjoy freedom.

Dear Bruce: I’ve never read how income from a reverse mortgage is taxed. Is it ordinary income or is it tax-free? – J.M. Henderson, Nev.

Dear J.M.: This is pretty simple. When you take out a reverse mortgage, funds received are not income but are loan proceeds. Loan proceeds are not taxed. If you were to stroll into your friendly bank and borrow $10,000 would you expect it to be taxed? Certainly not. Nothing different here. It’s just a different form of loan.

Dear Bruce: In the 1980s my father bought me land. The land is paid for, and about two weeks ago I got a call from the finance company that they – by accident – sold my land and wanted to give me the money they sold it for, which is $22,500. The land is worth about $50,000 now, and I told him absolutely not. I’m in the process of getting an attorney and getting the land appraised. Could this be a scam, and if so, how? Once I get the appraisal, can I call the finance company and settle this on my own or is that a bad idea? – M.H., via e-mail

Dear M.H.: How in the world they could sell your property by “accident” is beyond my understanding. The only way that could happen is if they started a foreclosure and the court awarded them the property. Otherwise your signature, at the very least, would be necessary. You also didn’t tell me when this property was sold. There is no way in the world I’d let them off the hook for $22,500 if it’s true that it’s worth $50,000. Is it a scam? I don’t know, and I’m not sure that’s material. It’s very unlikely, but possible they will settle with you. If you do hire an attorney, you should hire them by the hour, not on a contingency basis where their fee could be as much as a third. I don’t think this is a matter that will require a great deal of attention on the part of an attorney. If you feel that you are a good negotiator, by all means propose a settlement. If they reject, then go to the legal route.

Dear Bruce: My aunt died in 2003, leaving me a house in her will. I sold the house in 2004. My computer tax program added that amount to my income and says I have to pay capital gains tax on it. Since it was an inheritance, is this true? I’m hoping it’s incorrect. I had the house professionally appraised for $72,000, but it sold for $58,000. – J.H., Knoxville, Tenn.

Dear J.H.: You know that I am not that wildly enthusiastic about computer tax programs. With that having been said, there are many of them that are very good. You mentioned that you had the house professionally appraised at $72,000. If this was a legitimate appraisal, and that’s what your basis would be since it was an inheritance and it was sold at arms length, meaning someone not associated with you, for $58,000, I don’t believe there would be any tax. This is my opinion based upon chatting with some of my experts.

Dear Bruce: I have owned my own home for five years, and I have $28,000 of equity. I will be married soon and will be moving out of state with my new husband. I would like to know if I am better off financially to sell the house outright or rent it out and sell it later. If I keep it, I will need to get a second mortgage to use as a down payment on our new home. – A.P., via e-mail

Dear A.P.: Single-family homes rarely are good investments from a rental perspective. Furthermore, since you will be out of state, maintaining rental property at a distance is equally difficult. All things being considered, I would get this home on the market as quickly as possible, and take the cash with you when you leave.

Dear Bruce: I’d like to know when real estate changes hands. Is it at the closing or when the deed is filed? – Reader, via e-mail

Dear Reader: Real estate changes hands at the closing. It is advisable to file the deed, but if there is no lender involved and you choose not to file – while it is not the smart thing to do – you are not obliged to make this public announcement.

Dear Bruce: My brother and I have a rental house out of state. I claim my half of the expenses and income every year on my taxes. However, my brother does not claim his; he said he does not want to claim his part of the expenses and income. I’m thinking of selling my half to my brother. Will I have to claim that amount of the sale that I receive? – Reader, via e-mail

Dear Reader: Whatever your brother does is of no concern to you. His idea of not wanting to claim it doesn’t stand much testing. If he’s receiving income that has to be declared, expenses can be deducted. That having been said, if he is purchasing your interest in the home, there may be tax consequences depending on the price, depreciation and all the other variables involved. Do yourself a major kindness: Even though you may have prepared your own taxes, you would be wise to consult with an accountant on this one.

Dear Bruce: I am a 59-year-old widow. My husband passed away in 2004. I am planning to sell the home we lived in for 38 years and move to another state, along with my son and his family. I am expecting to realize a profit of approximately $400,000, which I will use to purchase a new home. I know that if my husband were still living, we would each be able to claim a $250,000 exemption. What happens now that it’s just me? – C.K., Oak Park, Calif.

Dear C.K.: You are correct when you indicate that you both could have claimed $250,000 in exemptions and, since your husband has passed away, you now only have the one. However, we have to define “profit.” Do you mean you’re going to gross $400,000? Or have you computed out the $250,000, acquisition cost and capital gains you may have made to the property over the years? I suspect by the time you get done calculating this thing, a decent accountant would be able to reduce your tax liability to very little or nothing. The $250,000 is solid. Be sure to use a competent accountant.

Dear Bruce: I am a 73-year-old widow with a small Social Security income of $664 per month. I also receive approximately $600 per month from my son to handle a lot of his dealings, and I personally take care of all of the expenses concerning the property and house. Because of his help, in 2004, two months after my husband’s death, I put my son on the trust deed as a joint tenant, which means he will get the property and house in its totality upon my death. My home is paid for and currently valued at approximately $400,000. Also, 12 years ago, he paid off our home and debts, totaling around $35,000, and he charged me 12 percent interest, which was to be paid off upon the death of my husband and myself. Now, many years later, I would like to sell the property because I can no longer manage the upkeep and pay the high utilities by myself. However, my son has said he would not agree to this as my joint tenant. Do I have any alternatives now that I’ve put him on as a joint tenant? How can I sell my property, and how can we each receive our fair share? – P.P., Las Vegas, Nev.

Dear P.P.: Unhappily, since you’ve given half your house to your son, he has a lot to say. However, it would seem to me that he ought to be reasonable in this matter. You can say to him that you will pay off the $35,000 plus the 12 percent, which seems outrageous, upon the sale of the property, but you certainly can’t stay in the house, and there’s no reason why you should. If he is recalcitrant, the likelihood is you are going to have to see an attorney. At the very least, he could and should be embarrassed, but it may be that the courts will understand why you proceeded as you did, and you may be able to have that transaction upset. Failing that, you could go to court and force him to allow you to sell or to buy you out. You can then use the proceeds as you wish. It occurs to me he is being very, very selfish in trying to preserve his estate. Hopefully, he will see the light. If he doesn’t, please consult an attorney.

Dear Bruce: My wife and I have decided to sell our house and buy a condominium. We have around $220,000 equity and the condominiums sell for between $300,000 and $400,000. Looking to the future, it seems to make sense to take out a 40-year loan or interest-only due to the fact that this will be where I live for the remainder of my years, which will cut down my house payment considerably. Is this a good move? Are there any programs out there for seniors when it comes to financing? – C.J., (no address given)

Dear C.J.: You’ve indicated that you will have about $220,000 to put down on your $300,000 to $400,000 purchase. You haven’t shared with me what other assets you may have and how much they are earning. It’s doubtful that you’ll get a 40-year loan, possibly a 30-year and very possibly an interest-only obligation. You should be very aware that the interest-only will continue forever since there is no reduction in principal and you’ll be obligated until such time as the condominium is sold. As long as you are reasonably certain that you’ll have an income that you can make these payments, that your other investments are outperforming the interest rate and taking taxes into account that you’ll be charged, this may be a good idea. There is a lot to recommend a senior’s owning outright and not worrying about payments. Without some idea of your current income and what your assets are, it would be difficult to tell you which is the better path to take. Your idea is a bit on the novel side. Most people want to become debt-free. This is not to say it’s a bad idea, just different from most of the letters I receive.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.