Trust Deed Unnecessary When Loan Is Paid Off
Q: I paid off my mortgage in August, 1988. However, when I asked my savings and loan to return the trust deed, officials refused, saying they are allowed to keep that document for six years and that I could get a copy of the full reconveyance from the county recorder’s office. I did. But what happens to my deed, and how can I get it now that my S& has been taken over by a bank? Do I need to get the trust deed back? --J. G.
A: Stop worrying! The fact is that you really don’t need that trust deed.
Remember, a trust deed is simply the document that pledges the home you are buying as collateral for the loan you are getting to make that purchase. Once the loan is fully paid off, you really need just two things: evidence that the reconveyance of the property into your name alone was properly recorded in the county recorder’s office, and the return of the promissory note that you signed pledging to repay your mortgage.
Since most homeowners these days don’t live in their homes long enough to repay their mortgages, these paperwork details are generally handled by escrow companies when the property is sold. However, a homeowner who prepays his mortgage--or resides in the same home for 25 or 30 years--should be sure to determine that his property reconveyance is properly recorded and that the lender returns the promissory note indicating that the loan has been paid in full.
Your letter does not state whether your lender returned the note. If not, contact the lender and obtain it.
Out-of-State Income Still Subject to Tax
Q: You recently wrote that the state of California doesn’t levy income tax on interest generated by bank accounts held by residents of other states. Does this mean that as a California resident I would only be required to pay federal income tax on interest earned outside the state? This sounds too good to be true! --J. M.
A: It is.
As a California resident you are liable for both state and federal income taxes on all your sources of income--salary, interest, dividends, commissions, bonuses, etc.--just as you have always known. Your obligation to the state of California is not changed by the location of your source of income; you still pay taxes to California on that interest. But it is also highly likely that you would not be required to pay taxes to the state where that out-of-state bank is located.
The issue raised in the earlier column involved a former California resident who still had bank accounts in the state. California tax law allows the state to levy income taxes on certain types of income earned by out-of-state residents. For example, recipients of pensions based on jobs held in California are obligated to pay California state income tax on those pension payments, even if the retirees move out of the state.
Similarly, out-of-state residents with real estate investment earnings and real estate sale profits in California are also subject to state income taxes. But this principle does not apply to bank interest earnings, stock dividends or stock sale profits.
Most states have similar tax laws on this matter. And, more importantly, they recognize the laws of other states. This means that, except in a few instances, taxpayers are allowed to deduct the pension income or real estate profit taxes paid to one state from their tax obligation to the state in which they now reside.
Tax Basis for House Is Original Purchase Price
Q: In my divorce settlement, I am getting the house. It has a tax basis of $240,000 but was appraised at $590,000 as part of the divorce settlement proceedings. Is the $590,000 my new tax basis? My accountant can’t seem to give me an answer. --J. W. W.
A: No. Section 1041 of the Internal Revenue Code is quite clear on this matter, and if your accountant can’t figure it out, perhaps you should re-evaluate his competency. Assuming you didn’t roll over a gain from the sale of a prior house, your tax basis in the house is its original purchase price, $240,000, plus whatever improvements were made to it.
Section 1041 of the Internal Revenue Code provides that if the marital home is sold from one spouse to another “incident to a divorce,” the selling spouse (in this case, your husband) does not have a taxable gain. Further, it says the buying spouse (you) keeps the original tax basis of the home, not its increased value based on the 50% sale that was based on the most recent appraisal.
These arrangements typically work to the advantage of the selling spouse. Our experts have repeatedly advised that because of the inequity inherent in these deals, the purchase price between spouses should be negotiable. Attorneys and accountants should be consulted before anything is signed to unravel tax ramifications.
By the way, the sale of half the house to your ex-husband does not trigger a reassessment for property tax purposes.