Fee-Only Planners Referred for Free
Q: In a recent column you recommended that readers needing financial advice consult a for-fee-only financial planner. I do not know how to find such a planner. Can you supply a list?-- G.A.H .
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A: The National Assn. of Personal Financial Advisers in Buffalo Grove, Ill., is happy to provide readers with its members’ names and addresses. Call the group at (800) 366-2732 and leave your name and address on the automated response line. You will be sent a list of NAPFA members working in your area. In addition, members working near you will be notified of your interest in the group, and several may contact you directly as a result of your inquiry.
You can also find fee-only financial advisers through the Licensed Independent Network of CPA Financial Planners. Call (800) 737-2727. Leave your name and address, and an association member in your area will contact you directly.
If Mortgage Balance Exceeds Home’s Worth?
Q: My condominium is worth about $40,000 less than my mortgage on it. In addition, I have been forced to borrow on my credit cards to make the large monthly payments. I have no net worth and am accumulating huge credit card bills. My lender won’t talk to me until I am at least two months behind in payments.
What if I just stop paying the mortgage? Will this hurt my credit ratings? So far, I have an immaculate credit history.-- D.E.G .
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A: The strategy you are pursuing is perhaps the worst possible of your admittedly limited choices, says Robin Leonard, a San Francisco lawyer and author of “Money Troubles: Legal Strategies to Cope With Your Debts.”
By charging your mortgage on your credit cards, you are pledging to pay non-deductible interest on top of the interest your mortgage already carries. Clearly, Leonard says, you must stop what you’re doing.
What should you do? Leonard says you have three choices, all of which have the same outcome: You will lose your home and all your equity in it.
One is to attempt to sell the condominium, taking whatever loss you must.
Leonard says a lender, however, is highly unlikely to accept any price less than the outstanding loan balance, making virtually impossible any sale of a condo worth $40,000 less than the mortgage.
Besides, a sale will take some time and effort on your part. If you want to keep the sale process as smooth as possible, you should keep current on your mortgage payments.
Another choice would be to stop paying your mortgage and let the bank foreclose on your loan.
You will, of course, lose any equity you have--but you are resigned to that outcome already. However, if you have a “purchase money” loan, you will not be liable for the unpaid mortgage balance. (Purchase-money loans, unlike refinanced mortgages, are non-recourse loans, meaning the lender cannot go after assets other than the home securing the loan.) However, a foreclosure will damage your credit rating and will remain in your credit history for as long as seven years.
Your best alternative and the quickest resolution, Leonard says, is to deed the property back to the lender in what in known as a “deed in lieu of foreclosure.”
All you need to do is get a quit-claim deed form from a legal stationery store. Complete it and record it where you originally recorded your home purchase--your local county recorder’s office. However, you should know that lenders typically do not like to receive these deeds without being consulted in advance, and they may reject the deed.
In addition, regardless of the type of loan, your lender has the right to pursue you for any outstanding balance remaining if you unilaterally deed the property back and it is not accepted.
In practice, however, lenders are unlikely to actually get this money, since the only practical avenue is a foreclosure, and the lender of a purchase-money loan is prevented from seeking the outstanding loan balance in the event of a foreclosure.
Heirs’ Tax Liability for Installment Sale
Q: In a recent column you said that a deed of trust for an installment sale is not afforded a step up in its basis upon the death of its holder and that heirs inherit the original tax basis of the property.
However, my research of available tax publications indicates the general proposition that the tax basis of inherited property is the fair market value of the assets at the owner’s date of death. Please provide your citation for your statement.-- R.A.B .
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A: As was noted in that column, the payoff of an installment note after the beneficiary’s death is one of several items the government considers “income in respect to a decedent.” Such income, which also includes accumulated untaxed interest on U.S. Savings Bonds, is specifically exempted from the step up in value in Internal Revenue Code section 691 (a)(4). It is also covered in Internal Revenue Service regulation 1.691 (a-5).
Taxes Owed on Second Home
Q: I recently sold my home and will move into another one that I have owned for years. Will I have to pay taxes on the profits from the sale because the home was purchased more than two years before the sale of the first one?-- T.D.S .
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A: Yes. In order to qualify for a tax-deferred rollover of home sale profits, taxpayers must purchase a replacement home within 24 months of the sale of the original residence.
The replacement home can be purchased 24 months before or after the sale of the original home, but the 24-month rule is nearly absolute, with only minor exceptions.
