Termite Damage Remains: Bug the Exterminator
QUESTION: After we bought our home, we discovered a preexisting water leak problem that the termite inspection company did not disclose to us. Also, considerable termite damage was not repaired, just covered up. We discovered many of the termite damage repairs had never been reinspected or signed off.
We blame the escrow company that handled the closing for not telling us. But they said, “Read the disclosures,” which absolve them of liability. Don’t they have responsibility for the $10,000 cost of repairs that were never completed before we bought our home?
ANSWER: No. An escrow company that handles a real estate closing is a neutral stakeholder. In some states, banks, title and law firms handle realty transfers.
The closing agent is not in the business of making certain all agreed repairs were actually completed. You or your attorney should have checked to be sure that the termite repairs were performed and that a clearance was issued by the termite inspection firm.
The termite company that failed to do its job is responsible, not the escrow company. For more details, please consult a local real estate attorney.
FHA Does About-Face; Won’t Cancel Insurance
Q: My house is worth about $80,000 and I owe $40,000 on a FHA mortgage. I refinanced a year ago and was told I must have mutual mortgage insurance (MMI) for a year. My loan has now been sold, but the new lender refuses to cancel my MMI even though it is obviously not needed. How can I cancel my MMI?
A: You probably can’t. Even though FHA says its MMI (sometimes called MIP) can be canceled at any time by the insured lender, every FHA lender I’ve ever encountered refuses to cancel the mortgage insurance. I have never heard of an FHA borrower who got his or her mortgage insurance canceled until the loan was paid off. If you refinance with a non-FHA lender, you won’t have to waste your money on that unneeded mortgage insurance.
Landlord Finds a Way to Legally Avoid Tax
Q: I own three single-family rental houses, worth about $75,000 each. Can I do a Starker delayed exchange of the three houses for a $250,000 single-family house, rent it for a year and then convert the house to my personal residence without paying tax? And if so, can I sell my current home of 20 years, valued at about $110,000, without paying profit tax? Finally, when I convert the $250,000 rental house to my personal residence after renting it for a year, will I then owe any tax?
A: You have created an excellent, perfectly legal tax-avoidance plan. Yes, you can make a Starker delayed tax-deferred exchange of your three rental houses for one larger rental house. The basic rule is to trade equal or up in both equity and value without taking out any taxable “boot” such as cash or net mortgage relief.
Of course, the sale of your $110,000 principal residence will be tax-free since your profit is well under the new $250,000 ($500,000 for a married couple filing jointly) home sale tax exemption. When you convert the $225,000 rental house to your personal residence, you won’t owe any tax because no sale occurs, so there is no taxable event. Please consult your tax advisor for complete details.
Co-Buyer Must Put Name on House Title
Q: My partner and I plan to buy a house together. He doesn’t need the mortgage income tax deductions as much as I do. He’ll make the down payment, but I will co-sign for the mortgage. Is it necessary for me to be on the deed of ownership to qualify for the mortgage interest deduction? Can I claim only half of the interest or all of it if my partner claims none of it?
A: To be entitled to the residence mortgage interest deduction, you must incur a detriment if the mortgage payments are not made. That means you would suffer if you did not make the mortgage payments.
Technically, you need not have the mortgage in your name. Millions of homeowners, for example, have purchased home titles “subject to” existing mortgages for which they are not legally liable. However, if they fail to make the payments, they lose their homes, so they are entitled to deduct the mortgage interest although they did not assume the mortgage.
But your mortgage lender is going to require you to both hold title and be a mortgage co-signer. I’ve never heard of a lender’s approving a mortgage when a co-borrower is not also a title holder.
If you make 100% of the mortgage payments, you can deduct 100% of the interest. However, if you pay only 50% of the mortgage payments, you can deduct only 50% of the interest deduction.
Buyer Has Document; Seller Must Pay Taxes
Q: I bought my home last October. At the closing, the property taxes were prorated between buyer and seller based on the 1996 tax bill because the latest tax bill wasn’t available. The 1996 tax was very small because the house had not yet been built and the property was only a vacant lot. We both signed a document that we would reimburse each other for discrepancies over $100.
I submitted a copy of our 1997 taxes to the title company where we closed the sale. The company informed me that the seller’s prorated share is $1,267. How can I get reimbursed from the seller?
A: Because you have a signed agreement with the seller to prorate the property taxes after the 1997 bill arrived, the seller is obligated to pay his share. I presume you have made a demand on the seller to pay up.
If the seller refuses to reimburse you for property taxes, which I hope you’ve paid by now, the appropriate place to seek redress is Small Claims Court. This looks like a slam dunk win for you, because you have a written agreement to show the judge.
Age Is No Barrier, but Don’t Raid IRA
Q: I am a 48-year old single first-time home buyer. Recently I made a bid on a $245,000 home. My intent was to put 20% down so I can avoid private mortgage insurance. I was going to use $29,000 cash and pay the balance by liquidating my IRA. But the sale fell through.
I am continuing my home search. However, I’m wondering if it would make more sense to get an 80% first mortgage, plus a 10% home equity loan, and pay 10% cash down payment. I plan to work until age 65. Is that better than liquidating my IRA?
A: Yes. Presuming you can qualify for both a first mortgage and a home equity loan, that is better than raiding your IRA for the down payment. Another alternative is to specify in your purchase offer that the seller is to carry back a second mortgage for 10% of the sales price. This is quite common and is called an 80-10-10 sale.
Before shopping for a home, however, please get pre-approved (not just pre-qualified) for both a home loan and a home equity loan. Many banks offer combination approvals for both types of loans.
P.S. You’re never too old to buy a home. My parents bought their condo when they were in their 70s.
Tax-Deferred Exchange Requires No Payback
Q: I bought a house in 1972 and lived in it for four years, then turned it into rental property. I have refinanced it three times, taking cash out each time. Now I want to do a tax-deferred exchange for a different rental property. Must I put the money I took out during the refinances back to do this exchange? There is sufficient equity in the property to make the down payment on the property I want to acquire.
A: A major advantage of a rental property tax-deferred exchange is that the investor need not put refinance cash back into the trade. That tax-free money is yours to spend as you wish. Of course, I’m presuming you meet the IRC 1031 tax-deferred exchange requirements of trading equal or up for another investment property without taking out any taxable “boot,” such as cash or net mortgage relief, at the time of the exchange.
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The new Bruss special report “How to Buy Your Home for Nothing Down” is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010. Credit card orders are welcome at (650) 348-6900 or fax at (650) 348-6916.
