It could be the time to buy that bigger house By Ilyce Glink and Samuel J. Tamkin Friday, February 25, 2011; 10:34 AM Q. I own a home and owe $388,000 on the mortgage. I think the home is probably worth $370,000. I bought the home for $417,000 in 2006, so I've taken a big hit on equity like everyone else. I have no issue making the payments but feel as though I am trying to dig myself out of a hole. I make an extra payment a year plus pay an additional $200 each month toward the principal on the loan. Given how low interest rates are right now, do you think it would make sense to sell my house at a loss and trade up now? I live in a starter home and think it makes sense to trade up while prices on bigger houses and mortgage interest rates are really low. I could easily afford to buy a home for $600,000 to $700,000 and put down close to 20 percent. Am I crazy to want to make the move now? A. I can just imagine all the e-mails I'm going to get from real estate agents wondering whether they can sign you up as a client! Seriously, I think there are a lot of buyers wondering the same thing: Is now the best time to trade up and buy a bigger house while mortgage interest rates are still low? If you want to buy a bigger house, now is the time. You'll have to make good on what you owe on your current home, but if you can sell and get out, good for you. Then, you can shop around for the bigger property that you want and buy at today's relatively low prices. I'd love to see you put down 20 percent, because otherwise you'll get killed on private mortgage insurance. Also, you'd want to make sure you don't get a loan bigger than $417,000 so that you're in the conventional market. In high-cost areas that limit is temporarily $729,750. Keeping the big picture in mind (you're losing a little money on one house but hopefully making it up by buying a home that you can stay in for the long run at an equally reduced price) is a smart way to go. To put it differently, if real estate prices had increased across the board, you would sell your place at a profit but have to buy your next place at an increased price. It's all relative. If you plan to live in a home for the long term, you might find the right home for yourself now and lock in an interest rate that appeals to your budget as well. Here's another reason to move now: There may be uncertainty in the market coming down the line with proposals that may do away with Fannie Mae and Freddie Mac. Some proposals may cause interest rates for homebuyers to go up and may make it harder for some homebuyers to get money together to buy their homes. I think you're on the right path. Hope this helps. Q. I have some questions regarding the tax exclusion homeowners are entitled to when they sell their primary residence. Let's say a homeowner who has lived in his primary residence for at least two of the past five years is selling his home. As I understand it, he is allowed to keep up to $250,000 tax free of the profits. But let's say that six months to a year before the home sale, the homeowner marries and files jointly. Although one of the individuals hasn't lived in the home for the full two years, would they still be allowed to take up to $500,000 tax free? Also, let's say there is some profit above the $500,000 or $250,000 (if the spouse is ineligible). Will the amount be taxed at the marginal tax bracket of the individual or couple or is it a flat 3 percent or 4 percent on the amount? A. According to IRS Publication 523, by selling your home, you and your spouse would qualify for the $500,000 exclusion if all of the following is true: You are married and file a joint return for the year in which you sell the home; either you or your spouse meets the ownership test, in which you or your spouse owned the property and lived in it as a primary residence for at least two of the past five years, and, during the two-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. If the owner of the property has owned the property for only 18 months before selling, he or she can take a proportionate share of the profits as an exclusion on his federal (and typically state) income tax return. So, if you lived there for 18 months, you'd multiply your profits by 0.75 (or 75 percent of the two years required to take the full $250,000 tax free). If you're married, you'd use $500,000 instead of $250,000. To answer your second question, for profits in excess of what you can legally exclude, you'll pay long-term capital gains tax, up to 20 percent, depending on your income level. That is dictated by how much you and your spouse (if you have one) earn. For more details, check out IRS Publication 523, Selling Your Home. irs.gov/pub/irs-pdf/p523.pdf Q. I have a first mortgage and a home equity line of credit and am wondering whether refinancing makes sense for me. On my first mortgage, I owe some $9,000, which is at 6.85 percent. I only have about a couple of years left on the loan. As far as refinancing this mortgage, I don't think anyone would be interested in doing this, and the closing costs would probably negate any savings. But I also have a $6,000 home equity line of credit, which will take me another few years to pay off. The interest rate on the equity line of credit is about 8 percent. Would it make sense to combine these loans? Could I get anyone interested to refinance a $15,000 loan? What if I took out a little more money, for a total of $25,000, and did some work on the house? A. If you only owe $15,000, you might not be able to refinance - and it wouldn't be financially feasible to do it in any case. You should just work to pay off these loans as quickly as possible. As you suspect, your only option would be to get a larger home equity line of credit, and use it to pay off the $9,000 and then you'll have a HELOC at a very low rate (maybe less than what you already have). But I think the savings would be nominal and probably not worth the effort. You can talk to a lender and run the numbers to see if it's worthwhile to obtain a new loan to pay off both of your loans. If you can get a new equity line and feel confident that you can pay it off in a several years, and if there are no costs associated with the equity line, and if you can drop the interest rate and save a little money, you might want to try it. If you wanted to take out more money, you might have to do a cash-out refinance for somewhere around $75,000 to get a lender interested. But your home may not be worth that, or the improvements that you make to your home may not justify that loan. Unless you needed the cash for something specific, I wouldn't advise taking out a much larger loan and starting the time clock all over again on a 15-year or 30-year loan. Again, your best bet might be to simply throw all the cash at these loans that you can, and get them paid off as quickly as possible. Q. I'm a single dad trying to raise three daughters. My income was greatly reduced last year, so I applied for a loan modification in August 2010 from one of the big banks. I have an FHA loan. I was approved to begin the process and was informed that I would need to pay $400 per month over the course of the n ext five months. I was told that after five months my situation would be reevaluated. I jumped at the opportunity since my loan was crushing me. Now I'm informed that due to my payment delinquency (a delinquency that the bank created since I was current on my payments up until October) I have been rejected for Obama's underwater mortgage program. The program the bank is now directing me to will reduce my interest rate, but the $7,000 I am behind on the loan will be added back into the loan, basically wiping out all of the principal I was able to pay on the home over the last 2 1/2 years. In addition, the lender will get to reset the 30-year clock on me. Is there anything I can do? This house means everything to us! A. I'm sorry that you're in this situation. It's unfortunate that you were not approved for the Obama underwater mortgage program for FHA, but it sounds as though this big bank didn't do you any favors and didn't direct you to the correct program from the outset. It also sounds as though you didn't do enough investigating early on. You can certainly file a complaint with the Office of the Comptroller of the Currency, which regulates the big banks. The website you'll want to go to is HelpWithMyBank.gov. Use the complaint form and hold onto your complaint case number. But let's look at the options on the table: If the deal will wipe out any late payments and reset your credit history, then you should do it. While it feels as though you're losing equity, the $7,000 is money you would have paid with your regular payments during the time you paid the lower amount. It includes interest and principal. You should check to determine whether they also added penalties and other fees to that amount. What's killing your home equity is the general state of the local real estate market, but that's a separate issue. It doesn't matter how much of the loan you've paid down if property prices have fallen by 25 percent in your neighborhood because of foreclosures. If you can get the loan to reset and start again, that's a pretty good deal as far as it goes. I don't think you'll get a better offer unless the OCC complaint gets the bank to unwind the original decision and make you eligible again for the Making Home Affordable program. I know you're a single dad trying to make this work, but remember that this house is only four walls and a ceiling and floor. You and your family make the home, not the building. That's what you bring to the table. Q. Although I'm a naturalized U.S. citizen, I'm originally from Argentina, where most of my family lives. I'm looking to purchase a home in California, and my family is willing to help me with part of my down payment. Can I receive a fairly large amount of money as a loan or gift from my family to buy a home in California? If so, what is the procedure and what kind of documents will I need? Should I expect to be taxed on the money I receive from my relatives? A. As a U.S. citizen, gifts you receive should not be taxable to you. Generally, the person who gives you a gift may be subject to taxes in the United States, but those taxes may not apply to your relatives. Your relatives in Argentina may want to talk to an accountant about any issues their would face regarding their accounting and tax issues there. As far as your situation is concerned in the United States, when you receive money from Argentina, you may need to have a paper trail detailing who has sent you the money and from where. In some cases, the best way to receive money from a foreign country is via wire transfer to your bank account. Since the source of those funds will be in Argentina, your bank may require certain documentation from you. Talk to an officer in the bank branch where you plan to use to receive the funds. Ask what documentation you need to receive the funds and what information you need to give your relatives sending the funds. If you are going to receive an amount in excess of $10,000 from your relatives, you might want all the funds to come into your account in a single transaction to eliminate paperwork and hassle. Once you have complied with any bank paperwork requirements, you will also need to talk to your mortgage lender about the receipt of those funds. Usually mortgage lenders want to see more information to substantiate a large deposit of funds into an account. Funds that have been stable in an account for six months or more might not be questioned, but if the deposit was made within that time period, your lender will want to know more about the deposit. The lender will want to know why you received the funds, who sent you the funds, where your relatives obtained the funds that they sent you, and that the funds were given to you as a gift and not as a loan. If you're just starting the process of looking for a home, have your relatives send you the funds now and letting them "cure" in your account for a while. Remember to make sure to follow all of your bank's instructions on having the wire transfer sent from your relatives in Argentina to your bank account in the United States. Q. My husband and I previously owned two houses. We separated for a few years, and he lived in one home and I lived in the other. Two years ago we reconciled and purchased a third house, which is now our primary residence. We want to sell the other two houses. Do we have to pay capital gains tax on these houses? A. You have a tricky question. The general rule is that you can exclude from federal income taxes up to $250,000 of profits from the sale of your primary residence if you have lived in that residence for two out of the last five years. If you are married, you can exclude $500,000 of profit from the sale of your primary residence from federal income taxes. Since you have not lived in either home for the last two years, the time is running out to satisfy the two of out the last five-year requirement. If you fail to sell and close on the sale of the home by the time you celebrate your third anniversary of having not lived in the homes, you will no longer qualify for the basic requirement that would allow you to exclude any gain from the sale of the residences from federal income taxes. While there are some exceptions to this rule, it does not appear from your question that you would be entitled to any of those exceptions: change of employment, health reasons or other unforeseen circumstances. You stated that you both have been married but at times have lived separately. The first thing for both of you to determine is whether you will have a profit on the sale of your homes. If based on current real estate market conditions you will not have a profit, you shouldn't have to pay taxes on the sale of the homes. If you've rented the homes and you've taken tax benefits from the home due to their becoming investments, you may have taxes to pay. Assuming that both of you have been filing your own tax returns, if each of you lived in your homes for two out of the last five years and each of you maintained your primary residence in your respective homes, you should be able to exclude from any federal income taxes up to $250,000 of gains. That's to say, if you each made a profit on the sale of the homes, each of you could keep up to $250,000 of the profits without paying any taxes to the federal government. But each of you will have to file your own returns for the year in which the home was sold. If the profit on the sale of either home is more than $250,000, the profit in excess of that amount will be taxed to you at your capital gains rate of up to 20 percent. Finally, if either one of you rented the homes and took depreciation on the homes, you'll have to pay back that benefit when you file your income tax return. When you have an investment property, the federal government allows you to take certain tax benefits from the ownership of an investment property. But those benefits must be repaid to the government when the property is sold. If you have an idea of what the properties will be sold for, you should try to take a stab at figuring out whether either of you will have a profit. Take the purchase price for each home, then add to that number the costs you incurred in purchasing that home (including loan costs and title insurance fees), include all capital expenses you incurred while you owned the home (new roof, boiler, new windows, etc.), and then add to that all of the anticipated costs to sell the home such as commissions and fees. Once you have that number, you can compare it to the price you expect to get for the home and you'll have a rough idea as to whether you have a profit on the sale. or not. If you bought the home for $100,000 and had purchase costs of $5,000, then put in two new bathrooms and new kitchen appliances and cabinets at a cost of $30,000; and when it came time to sell the home for your anticipated selling price of $150,000, you expect a real estate commission on the sale of $9,000 along with other closing costs of about $6,000, you'll expect no profit on the sale of the home. All of the costs and expenses will have eaten up any profit. Talk to your accountant further to see if you might end up with a profit and whether you would qualify for the $250,000 exclusion on the sale of each of the residences. Also go over any of the particular issues that may affect your specific circumstances. 60022, or contact them through Glink's Web sites, www.thinkglink.com and www.expertrealestatetips.net.