Ask Realty Times - December 3, 2004
by Peter G. Miller
Question: Is private mortgage insurance based on the original purchase price of the home, the current value or the refinanced amount? Answer: When you buy a property with less than 20 percent down and conventional financing then lenders will either require private mortgage insurance (MI) or self-insurance in the form of a higher rate. When you refinance you will obtain a fresh loan and private mortgage insurance or lender self-insurance will be required if the loan represents 80 percent or less of the property's equity. MI premiums are based on such factors as the amount of the loan, the down payment, the borrower's credit history, the type of loan (fixed or adjustable), whether the property is owner occupied or a rental, and the property's value. For additional information, go to PrivateMI.com. Question: How long should you keep transaction paperwork from a home sale or purchase? Answer: You want to keep settlement paperwork to support tax claims. The government generally has a right to review tax returns for three years and six years if it thinks there were gross underpayments. See a tax professional for details. You also want to keep closing forms to establish a price basis for your home when you sell at some point in the future. This is important because you can shelter substantial profits under the current rules (up to $250,000 if single, $500,000 if married) from the sale of real estate you have occupied for two of the past five years. The bottom line: Keep closing papers with estate documents such as wills and living wills. They'll be valuable if you need to prove what you really paid for your home -- a matter that may not arise for 20 or 30 years from now. See IRS Publication 552, Record Keeping for Individuals for additional information. Question: How can we sell half of our duplex if it is now one property? Answer: You would need to sub-divide the property, meaning both the land and the "improvements" -- the home itself. Any current financing will have to be replaced (because the entire property is security for the loan), a new survey will be necessary and new deeds will have to be created. You will also need to resolve some questions: Does zoning allow for sub-division? Who is responsible for maintenance if the roof leaks or the driveway is covered with snow? Does the property meet building code regulations if sub-divided -- for instance, is there a fire-proof common wall? Are there separate meters for utilities? Are there separate furnaces and air conditioning systems? You could consider the formation of a co-op or a condo -- but be prepared for extensive legal work, work which might be cost-prohibitive. For details, start with a local real estate attorney who handles condo and co-op conversations. In all likelihood, the better choice will be to sell or rent the property rather than sub-divide. Question: I have a property I've only lived in for a year, but I want to find a renter in the next couple of months. Will I be able to get the capital gains tax exclusion when I sell in four years? Answer: The general rule is that you must occupy the property for two of the last five years to shelter profits as an owner-occupant. However, earlier this year the IRS clarified the rules and listed several instances where an owner could occupy a property for less than two years and still get some capital gains protection. As an example, moving more than 50 miles because of a job change. For more information, press here. Question: In our condo's declarations of covenants, conditions and restrictions it says no structure such as a dog house, trailer, tent, shack, garage, barn or other out-building can be constructed or used on any lot at any time, either temporarily or permanently, except by the developer in completing the development or builder. I have a storage box in my back yard to accommodate my pool supplies and I'm being told by the association that this is not allowed because they say it is a "temporary structure." I say it isn't. My storage box is 32 cubic feet. What can I do? Answer: Run for the architectural committee during the next condo election cycle. By any chance, is the association concerned that the storage box may hold dangerous chemicals or is not childproof? If yes, offer to secure it and otherwise make it acceptable to them. Question: Is it the seller's responsibility to pay the broker a commission if the seller decides at the last minute not to sell? Answer: When you enter into a listing agreement with a broker it is expected that the broker will have certain costs to promote the sale and a given time period to complete the transaction. By ending a listing early you limit the ability of the broker to sell the property and you may be sticking the broker with cash costs. In such circumstances, it's often best to offer to compensate the broker for reasonable costs so that the matter can be settled in a way that works for everyone. Matters change if the broker has found a ready, willing and able buyer who meets all the terms and requirements of the listing agreement. At this point the broker has completed the assigned task and has good reason to seek a commission. Question: I have a rental property and a residence. If I refinance my home and then pay off the loan on the rental property, my personal deductions will increase and my Schedule C business deductions will decline. Is it better to simply refinance the rental and deduct the interest as a business expense? Answer: You would use Schedule C if you are in the business of renting real estate. Deducting on Schedule C would reduce business income which means not only a lower income tax but also less to report on Schedule SE for the self-employment tax. If you use Schedule E for supplemental income and losses to account for your rentals, then the write-off value is akin to a personal deduction. In addition to write-offs, it's also important to consider how interest is charged. The interest rate on a residential mortgage will be significantly less than the rate paid for investment property. If you pay 5.75 percent interest for residential financing but 7.75 percent for investment real estate, with a $100,000 mortgage you would initially save $2,000 a year by refinancing the residence. To see which approach is best, prepare a spreadsheet that lets you see the impact of each option. Then review with your tax pro.
This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought. | 
