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Worried About Windfall

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Posted On: 05/13/2009

Q: My house was purchased 50 years ago, and it has remained in the family. If I sell, should I be concerned about capital gains?

A: At some point you acquired title through purchase or an inheritance. In general terms if the value now is greater than your cost than you have to look into capital gains. Alternatively, you're allowed to shelter up to $250,000 in capital gains if single and up to $500,000 if married when selling a prime residence so there's a good chance you'll owe little or nothing in many areas of the country. The rules can be complex. See IRS Publication 523, "Selling Your Home," for specifics and speak with a tax professional.

However, lets say you bought 50 years ago and now want to sell. See if you have the actual closing or estate papers from when you obtained title to the property, if not speak with a tax professional to determine how the property should be valued at the time of acquisition. You want to document your price and the cost of any capital improvements.

Settlement papers from transactions should be kept with other important papers. They are important not only for tax purposes but sometimes for other reasons.

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For instance, I refinanced a property and the process was moving along when the lender called to say I had not paid off an old mortgage. I was sure the old note had been repaid. The closing documents from an earlier refinancing showed the payment so I contacted that settlement agent. Turned out the loan had been paid but the public record had not been updated. The matter was solved that day by the settlement attorney - and without charge.

Q: I have an investment property that is financed. I send a check each month to the loan servicer, but now I've been contacted by the actual loan owners. They're willing to lower my interest rate to 4 percent from the current 6.25 percent for a five-year period for a cost of $1,995.

They say they're calling clients who have made their payments on time, and to help because of the drop in property values so their investment will stay solvent.

A: Let's say that you have a $300,000 mortgage and the rate is reduced by 2.25 percent for five years. That means your interest cost will fall by roughly $33,750 over the next 60 months - and it also means the investor's income will drop by that amount.

You say the investor is "calling" borrowers. Do you have anything in writing, anything sent through the mails, which explains exactly who has called or what they're offering?

Please keep your money until you have all information in writing. Ask your servicer if they represent this particular investor. If not, contact your state attorney general -- your "investor" may be familiar to them.

Q: Can a junior lender file suit against us if the first lender forecloses? We live in California, never refinanced, and this is our primary residence.

A: "Whether the junior lender can sue for a deficiency judgment in a court lawsuit as a 'sold out' junior will depend upon the nature of the junior loan and the type of real estate involved," says Rose Pothier, an attorney based in Santa Ana, Calif. "If the loan is a purchase money junior loan secured by 1-4 family dwelling, the junior lender must look only to the security to enforce the loan and not a personal deficiency judgment against the borrower, even where the junior lender is sold out by a senior foreclosure.

"Of course, if the junior lender forecloses non-judicially, there is no right to a deficiency judgment in any case regardless of the type of loan or property as the real estate acts as full security."

Many residential loans, she says, were put together as 80/20 (piggyback) financing to purchase property and, so long as those loans were not refinanced they should be protected by California's anti-deficiency laws.

Readers should be aware that foreclosure rules differ substantially by jurisdiction. Where I live - unlike California -- there's no special protection given to those with "purchase money" mortgages, the financing used to acquire a prime residence. If you face foreclosure please contact your lender immediately. If foreclosure looms then speak with an attorney to defend your rights.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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