Tax breaks come to those not on real estate title

Certain restrictions apply
By: Robert J. Bruss: Inman News
DEAR BOB: You had a recent item about two brothers who owned a house but one brother had bad credit. When they refinanced, the mortgage lender insisted the new loan be only in the name of the brother with good credit. But you said both brothers can deduct their share of the mortgage interest each actually paid. My question is about two unmarried people where one owns a home with a mortgage. For the second individual to deduct mortgage interest and property taxes, must that person be listed on the mortgage, just the title, or both, or neither? – Leslie M.

DEAR LESLIE: Great question! To be entitled to deduct home mortgage interest and property taxes as an itemized income tax deduction, you must (1) make the actual mortgage or property tax payment (or a portion of it), and (2) be legally obligated to do so.

There are many possibilities. If your name is on the title deed, but not on the mortgage obligation, you are entitled to the itemized tax deduction for payments you actually made. Your co-owner can deduct the other part of the payments he or she made.

Another possibility occurs for home buyers who are purchasing on a "contract for deed" or similar agreement where they do not yet hold the title, which remains in the seller's name.

In such arrangements, the seller retains the title but the buyer(s) make payments to the seller who then keeps up payments on any pre-existing mortgage. Such buyers are "equitable owners" entitled to the mortgage interest and property tax deductions.

Still another possibility occurs for homeowners who purchased "subject to" an existing mortgage without formally assuming it. Because they hold title, and would lose the property by foreclosure if they fail to pay the mortgage payments, they are entitled to deduct the mortgage interest and property taxes paid.

A frequent situation where the payor is not entitled to the deductions occurs, for example, where a son voluntarily pays mom's mortgage and property tax payments on her home, but he is not on the title and would not be harmed if he didn't make those payments. For full details, please consult your tax adviser.

SHOULD HOME BUYER PAY REALTOR'S $250 ADMINISTRATIVE FEE?

DEAR BOB: I am buying a house and recently learned about my Realtor's $250 "administrative fee." The agent is getting both the listing and selling commission. She did not tell me about this $250 fee. If I refuse to pay, and the listing-selling agent refuses to waive it, can I demand my down payment deposit back and cancel the sale? Although I am paying cash for the house, this fee was concealed under "conventional financing" on my closing statement – Kay M.

DEAR KAY: Some real estate brokerages attempt to charge unsuspecting home buyers (and sellers) like you an administrative fee, which is 100 pure profit for the brokerage.

Congratulations on resisting that unnecessary fee. The sales commission paid by the home seller is sufficient to cover the brokerage's overhead.

If I were you, I would make a very friendly phone call to the real estate agent asking her to pay the stupid $250 administrative fee from her sales commission. Most agents will gladly do so to save the sale. They hate these fees imposed by their brokerages as much as buyers and sellers do.

But you would be in breach of contract to your home seller if you refuse to complete the purchase over this little $250 item.

If your agent refuses to pay the $250 fee, I would instruct the closing settlement agent to refuse to pay that fee. Another alternative is to pay the $250 fee and then sue the agent and the brokerage in local Small Claims Court.

HOW IS RECAPTURE TAX HANDLED ON HOME SALE?

DEAR BOB: My wife and I bought our primary residence in May 2000 for $255,000. In December 2002, we moved to another home across town and rented out our former home until we sold it in June 2005 for $553,000. How do we handle the recapture tax for the depreciation deductions taken after we moved out in December 2002? Do we qualify for the $500,000 principal residence sale tax deduction? – Ethan B.

DEAR ETHAN: You clearly qualify for the Internal Revenue Code 121 principal residence sale $250,000 tax exemption (up to $500,000 for a married couple filing jointly) because you owned and occupied the home 24 of the 60 months before its sale.

However, this exemption does not include the depreciation you deducted since converting your home to a rental property in December 2002. The depreciation deducted on your former principal residence is "recaptured" (that means taxed to us normal folks) at a 25 percent federal tax rate, plus any state tax. Ask your personal tax adviser for full details.

MARRIAGE WON'T INCREASE HOME SALE TAX BREAK

DEAR BOB: My wife and I enjoy your excellent articles. Now we have a question. I've owned a home for 20 years and lived in it 2.5 of the last five years. I married my wife in August 2003. She never lived in this home I owned. We now rent this home and I moved into her home. We are considering selling my house. I know I would be entitled to the $250,000 principal residence sale tax exemption. But what about filing our tax returns as married? – Dean F.

DEAR DEAN: Nice try. You clearly qualify for the Internal Revenue Code 121 tax exemption of $250,000 because you owned and occupied your principal residence at least 24 of the 60 months before its sale.

However, marrying your wife in 2003 does not qualify for an additional $250,000 home-sale exemption. The reason is she doesn't meet the two-out-of-last-five-year occupancy test. Please consult your tax adviser for details.

HOW TO GET DEAD OR ALIVE EX-SPOUSE OFF HOME TITLE

DEAR BOB: Mom and stepfather divorced many years ago. Mother was given the right to live in their home. He was ordered by the court to stay away. But the house remained in both names. He has since been sent to a mental hospital by the court. Mom does not believe he will ever be released. However, she cannot get any information from the hospital if he is dead or alive, due to the privacy law. She still lives in the house. How can she get the house in her name only? – Evan B.

DEAR EVAN: Your mom's divorce attorney should have made certain her ex-husband signed a quit claim deed to her at the time of the divorce. She should contact that attorney for assistance because it was probably malpractice for his failure to complete that title transfer.

If that doesn't work out, perhaps because her divorce attorney is dead, if I were advising your mother I would suggest bringing a quiet title lawsuit in the court jurisdiction where the home is located.

But before doing that, she should check with the county or city where the stepfather might have died. If he died there, a death certificate will be recorded.

Your mother definitely needs an attorney to guide her through this legal maze to clear the title to her house.

HOME EQUITY AND REVERSE MORTGAGE UNAVAILABLE UNLESS YOU OWN THE LAND

DEAR BOB: I live in an excellent, five-star manufactured home park where the residents are shareholders. I contacted two financial institutions to secure a home equity loan. Both said they don't loan on manufactured homes. Isn't this illegal discrimination? I don't want to obtain a senior citizen reverse mortgage at this time – Ron M.

DEAR RON: Unless you own the land beneath your manufactured home, I don't know of any lender willing to make a home equity or reverse mortgage loan secured by your residence. Being a shareholder in your manufactured home park is not sufficient.

The reason is if there is a default, the lender can only foreclose on your personal property manufactured home (formerly known as a trailer).

However, if your manufactured home is located on a foundation on a deeded lot which you own, then you would be eligible for either a home equity loan or a senior citizen reverse mortgage.

The new Robert Bruss special report, "Seven Best Ways to Avoid Capital Gains Tax When Selling Your Home or Investment Property," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Questions for this column are welcome at either address.