Consult a CPA, but tax liability unlikely
I try to hold the “see a lawyer” response down to once a week, but this week’s response to keep down could probably be “consult a CPA.”
Q: My mother-in-law sold her house in 2016. The house was built in 1955 for $60,000. The house sold for $169,000. There were approximately $75,000 worth of improvements and upgrades done over the years. When the house sold, her takeaway was $129,000 after the Realtor commission, the payoff of a home equity loan and the closing costs. The proceeds from sale of house were put into a trust for which my husband is beneficiary. She passed away in 2017. Do we have a tax liability? — askedith.com. : I don’t know what that trust was like or the size of your mother-in-law’s estate. I don’t know whether she qualified for the home seller’s exemption on that sale. I don’t know how she reported it in her 2016 tax returns. But in any event, I’m pretty sure you don’t have any tax liability.
AQ: I am paying a Veterans Affairs loan on a house I bought in 2015. When I had my will and trust done, I was informed that my son (who lives with me) could continue making the payments without me transferring the title to him. I would prefer to sign the house over to him so he would have the advantage of the lower interest rate on the loan. I am 87 and in good health. He and another son have power of attorney, and the other son has no problem with the house staying in this manner, as he has his own home. Do you have any suggestions? — R. T. A : If you were to give the house to your son, he could take over the VA loan just as it is, assuming his income and credit qualify. He would also take over your cost basis for the property. If he were to wait to inherit the house, the mortgage could again remain with it, even if he doesn’t qualify. As an heir, he would receive a new — probably higher — cost basis for the house according to the home’s value at the time of your death or soon thereafter. That might make a difference in capital gains tax were he to ever sell.
Q: I have a question about a reverse mortgage. My husband and I are both in our early 70s and are planning to sell our four-bedroom home. We would like to buy a one-story townhouse. It has been suggested we could consider a reverse mortgage for our new home. I would appreciate your thoughts on the positives and negatives of a reverse mortgage. — K.H. A : For some seniors, a reverse mortgage is a fine resource. You’ll have to figure out for yourselves whether it’s appropriate.
With a reverse mortgage, homeowners don’t make monthly mortgage payments. Instead, they receive monthly checks from a converted portion of the home’s equity. There’s no magic involved: A gradual debt (with interest) builds up against the property, but it doesn’t have to be repaid as long as either spouse remains in the house. This plan started as help for seniors who needed more income but didn’t want to sell their paid-up (or nearly paid-up) homes.
Beyond showing that they can manage property taxes and insurance, homeowners don’t need to prove income or credit, because the debt needn’t be repaid until the house is sold someday. Instead of receiving monthly checks, homeowners can choose to receive a lump sum, set up a line of credit or — as in your case — use a reverse mortgage to buy a new home.
The money you receive is not taxable because it’ll be repaid someday. The borrower must be at least 62 years old; a spouse or partner could be younger.
With mortgage, a reverse homeowners don’t make monthly mortgage payments. Instead, they receive monthly checks from a converted portion of the home’s equity.