Smart Money: Second home's interest likely tax-deductible

Dear Bruce: I'm buying a second home, and I need to know the tax consequences. Will I be able to deduct the mortgage interest? Will this affect the deductions on my other home? Thank you. J.L., via e-mail

Dear J.L.: Under ordinary circumstances interest on up to a million-dollar value on the second home's interest is tax deductible. It will have no effect on your primary home. Should you choose to sell it, however, and there is a gain, you will not be given a tax advantage such as you receive on your primary residence. You could overcome this by making your second home your primary residence for at least two years. Before you make any of these moves, talk to a competent tax accountant in your area.

Dear Bruce: In 1992, my husband's grandmother quit-claimed her home to my husband and me with a life tenancy. When we had to get a loan, they required her signature. She was recently put into a nursing home, and her children removed all of her belongings. The utilities are now in our name, and we have paid the taxes all these years. Do we have a right to move in there and do some remodeling? J.M. Puyallup, Wash.

Dear J.M.: The home belongs to you. The reason that your grandmother had to sign loan papers is that while the home was quit-claimed to you, the home still remained in her name in terms of the deed. You might wish to see an attorney and have this put entirely in your name. If you have an outstanding loan, that will have to be retired. The life rights still are in effect, but the reality is that they will not be exercised. When that home was quit-claimed to you, it became yours.

Dear Bruce: I am in the middle of a divorce. My wife left, and we agreed that I will keep the house. How can I remove her name from the mortgage without refinancing? Our home is currently financed at 6.125 percent. T.M., Evansville, Ind.

Dear T.M.: Approach the lender with a request to remove her name. Considering the low interest rate and unless you have very substantial equity, the likelihood is they will not wish to do so. Both of you are obligated to repay should you default and the home was sold for less than the outstanding balance.

Have your wife execute a quitclaim in your favor. Have an attorney draw up the necessary documents.

Dear Bruce: I just bought a house for its appraised value of $107,000 with no money down. I want to redo the basement, update the electric and add central air. I can get a five-year, low-interest home loan at 3 percent. I need to borrow about $20,000. Is this the way to go, or do you think I should refinance? L.H. , via e-mail

Dear L.H.: It's unlikely you would be able to refinance since you bought a house with 100 percent financing. The only type of loans that offer 120 percent or 130 percent of value are nothing more than high-interest personal loans. Not a good option. I cannot imagine who would loan you money at 3 percent under any circumstances. I suggest you start a savings plan to pay for these improvements.

Dear Bruce: I have been managing/buying with |quot|creative financing|quot| single family/student rental property since 1990. Even with a long history of making about double payments to the mortgage company, I cannot get conventional lending at normal monthly payments. In January 2002, 75 percent of the units became vacant. What credit I did have is gone, and I need money for the property taxes. Any ideas on how to finance or sell to an investor? I would like to get at least market value for them. Reader, via e-mail

Dear Reader: The missing ingredient is why three-fourths of your rental units are empty. Empty rental units lose value for obvious reasons; value is in direct correlation to income. Unless you cure the vacancy factor, you are going to take a huge bath.

Dear Bruce: Several years ago, my mother-in-law decided she wanted her home to go to her children rather than to her second husband, should she precede him in death. She deeded the home to my wife and her two brothers, but retained a life estate. Soon, she will have to go into an assisted living facility. My wife would like to sell the home and use the money about $100,000 to give her mother a better quality of life during her last years. We do not need any inheritance. The problem is my brothers-in-law, who are next-to-worthless and have been in financial trouble all their lives. Of course, they are very interested in the money. They are unlikely to sign over their interest in the house. Is there any way out of this mess? R.D., via e-mail

Dear R.D.: When your mother-in-law gave the property to your wife and her brothers, they received a clear, sustainable interest. There is nothing you can do other than deal with them. When she goes into the assisted living facility, the house could be sold and your one-third could be spent any way you wish. The evil brothers will most likely take the money and run. If you and your wife wish to contribute the other $30,000 plus for your mother-in-law's care and comfort, that is your choice. The mistake was made by your mother-in-law by trying to be equitable.