Real Estate Matters: Financial Questions and Answers - September 5, 2009
By Ilyce Glink

Q: In a recent column, you wrote, "The amount that one individual can give to another without trigger the gift tax in 2009 is $13,000."

I was very surprised by this answer, since you're usually so accurate. If you read IRS Publication 950, you'll see that the tax rate for the first $1 million of gifts to a person, in excess of annual limits, is essentially zero, since any tax due is offset by credits. So a parent could (for example) give a child a $300,000 property without paying a single dime of taxes on the gift, if gifts to that child, to date, were less than $700,000.

I guess the bottom line is that the U.S. Government (I'd say "the IRS," but I suspect that the ultimate source is wording of congressional legislation) uses confusing language: Gifts above the annual amount are "taxable," but for most people no tax will actually be due.

It would be much simpler if there were a higher annual limit (say, $100,000) and no lifetime figure (or offsetting credits) at all. But that wouldn't provide employment opportunities for tax accountants and tax lawyers and estate planners, or for workers at the IRS, so I guess there are not any lobbyists working to simplify matters.

In short: Those expecting to give a person more than $1 million between gifts and estate proceeds should almost certainly pay an estate planner for advice on things like trusts. Those not expecting this (the vast majority of people) should worry about other things than exceeding the annual limit.

A: Thanks for elaborating on my answer in two e-mails, which I have edited into one comment for clarity.

Just to be clear, the amount that one individual may give another in 2009 without triggering any sort of taxable event down the line, and also without triggering any IRS paperwork or forms, is $13,000. But I agree that you can give up to $1 million per lifetime total. Thanks for the additional explanation.

Q: I have a home that was used as my primary residence from April 2002 until December 2006. This December, it will be three years since we've been out of our house. We are currently renting it to a family member who is interested in buying it but who is having a lot of trouble getting financing. It doesn't look like they will be able to get a loan by December.

Other than moving back into the house, what options do we have to keep our capital gains exemption, and sell the house to my family member?

A: For some time now, homeowners can exclude from federal income taxes up to $250,000 (if single) or $500,000 (if married and filing jointly) of capital gains from the sale of their primary residence. One additional rule is that the homeowner must have lived in the home as their primary residence for two out of the last five years.

One way for you to sell the home if the buyer can't get conventional financing is to offer the buyer seller financing or sell the home on an installment basis. By using an installment sale you would qualify for the benefits of the tax exclusion but you would take the risk of being your buyer's lender -- something that might not be comfortable.

You should also consider how much money is involved. As a result of recent housing price declines, your profit might be less than you think. You should sit down and compute what your profit will be if you sold while you still qualified for the home sale tax exclusion. Then you should determine what your taxes would be if you sold the home while you did not qualify. For many, the maximum capital gains tax is 15 percent.

If your computations show you'd have to pay taxes if you don't sell in time, and you don't want to sell the home on an installment basis or provide the buyer with seller financing, your options to preserve your tax status might be quite limited.

If your gain is large, you would be wise to sit down with a good accountant to go over all of the aspects of your home ownership to see if there are any other tax rules could help your situation. Please note that if you have taken depreciation for the property over the past three years that it has been a rental, you might need to "recapture" that depreciation. You should chat with your tax advisor or accountant for more details.

As an aside, if the home is no longer eligible for the home sale exclusion and you were planning on using the money to invest in an investment property, you might benefit from a 1031 tax-deferred exchange of properties. In this type of an exchange you would sell the home and buy a like-kind property. That would allow you to defer paying all taxes, including recapture taxes on any depreciation you took, until the replacement property is sold. In some cases, you might not have to pay taxes at all.

But you'll need to be careful. The 1031 tax-deferred exchange rules are rather specific and can be complicated. Do yourself a favor and talk to a professional in the area of tax-deferred exchanges for more information.

Q: The IRS form for the $8,000 first time home buyer credit appears to define "relative" as a parent, child, grandparent or grandchild. But it does not list "siblings" as a relative.

If the IRS wanted to exclude purchases from siblings, wouldn't IRS have included that in its definition? IRS often comes up with definitions that a common person would not necessarily agree with, such as the IRS definition of a child.

With this in consideration, will a purchase from a sibling qualify for the $8,000 credit?

A: Judging from my mail, there are a lot of folks who are considering buying a house from a relative, such as a sibling, aunt, uncle, niece or nephew.

For the purposes of helping buyers figure out from whom they can buy a property and still qualify for the $8,000 first time home buyer tax credit, the IRS defines "relative" on its documentation as a parent, child, grandparent or grandchild.

Siblings, aunts and uncles aren't mentioned on some of the forms, but buyers are referred to IRS Publication 544 for more details. In that publication, close relative is further defined as members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

So in answer to your question, if you plan to sell to a sibling, your sibling buying the home won't qualify for the $8,000 first time home buyer tax credit. However, it appears that you can buy a home from an aunt, uncle, niece or nephew and still qualify for the credit.

While the tax credit forms may not give you the answer directly, it seems that the intent of the tax credit is to exclude family members. Perhaps the IRS believes that family members might abuse the tax credit or set up arrangements to benefit from the tax credit without actually selling a property.

There are still plenty of other rules surrounding the $8,000 first time home buyer tax credit: The buyer must not be a relative (as defined above); the sale must close before the end of the day on November 30, 2009; neither the buyer nor his or her spouse can have owned a home in the past 3 years; and the buyer must not earn more than $150,000 in adjusted gross income ($75,000 if its an individual purchasing the property).

If you're planning to buy a home by November 30, 2009, you're running out of time. Getting your financing in order could take at least six weeks.

Q: My aunt lives in Georgia, and said she heard you talking on your radio show about the new law for home loan modifications. I currently have an FHA loan through one of the big box lenders and am now three months behind, due to medical reasons.

I have talked with a representative from my lender, and they are supposed to be doing a medical hardship loan modification for me once I get everything faxed over to them.

The lender is giving me a three-month trial loan modification to see if I can make these next three payments on time. If so, they will modify my loan. Our normal payments are $1088.83, and the three payments they have us set up on are $1130.39.

My question is, do you think this is the route I should take or should I wait for the new law to take effect? I would greatly appreciate any help or advice you can give me. I am trying to avoid foreclosure and will soon be three payments behind.

Thank you for your help.

A: I'm confused as to how you can you afford to spend more on the modified loan than you did on your old payment schedule. It sounds to me that the lender has simply tacked onto your payments what you owed and re-amortized your loan payments. That's not much of a loan modification.

A better option would simply be for your lender to extend your loan to a 30- or even 40-year term to get your payments down. This might allow them to leave your payments where they are or even make them lower.

You might also press your lender to lower your interest rate all the way down to 2 percent, if it will get your payments back to around 31 percent of your gross monthly income (or even less than that) so they are affordable as you come out of this medically induced financial crisis.

I'm concerned about you signing up for a loan modification that requires higher payments. Almost 70 percent of loans that were modified have gone bad, most because payments weren't reduced at all, and in some cases were higher. I don't know what the lenders are thinking, but if you can't afford your payments before your loan is modified, how can you afford to make higher payments during the trial loan modification period?

You don't mention where you are with your health issues, but I hope they're all behind you now. For general knowledge, all loan modifications are temporary for several months, and can be made permanent after you have made three on-time payments.

I don't know what new law you're referring to, but the big box lenders and other loan servicers are being pushed by the federal government to step up their actions to help more people modify their loans.

Currently, the Obama administration is attempting to get lenders to modify borrowers' loans under the Making Home Affordable loan program. Under the plan, lenders are encouraged to modify terms for troubled loans by reducing the interest rate or extending the term. In some cases, interest rates can be reduced to two percent and terms can go out to 40 years.

FHA announced a new program for loan modifications that would allow a modification to be based on 70 percent of the loan. The remaining 30 percent would be a silent second loan at zero percent interest. You would not have to pay off the second until you pay off your first mortgage or sell your home.

The FHA loan modification program was supposed to be active by August 15. I haven't heard much about it, which makes me think that the deadline has slipped. You can read about the program in the newsroom at HUD.gov.

I'd go back to your big box lender and ask them to do more to cut your payments. You may be eligible for an FHA streamline refinance, which would simply cut your interest rate. If you need help, call the Homeowners for HOPE hotline at (888) 995-HOPE, or speak to a HUD-certified housing counselor.

Q: I filed for a Chapter 13 bankruptcy back in 1997. It was paid in full and discharged. Now that it is 2009, will the bankruptcy continue to appear on my credit report? If so, how do I get it removed?

A: The bankruptcy should only stay on your credit history for 7 to 10 years, depending on what kind of bankruptcy you filed. But, it wouldn't matter as much to your credit history or score in the 10th year as the first. But it's been 12 years since your bankruptcy, so it should have fallen off of your credit history and not count as a negative for your credit score.

Find out how your credit history looks by pulling a copy at AnnualCreditReport.com. While you're on the site (which is the only Web site that is a joint venture of the three major credit reporting bureaus), pay the $8 for a copy of an Equifax score (which is closest to the FICO score). If you've had a good credit history ever since, and always pay your bills on time, I'm pretty sure you'll have a very good credit history or score.

If you do, by chance, see the bankruptcy still listed, it may not be affecting your score. But you can dispute the information, and provide proof that the bankruptcy was discharged more than 10 years ago.

While the bankruptcy might have been over 10 years ago, if you are still paying off debts or obligations under the bankruptcy plan, that might result in the bankruptcy still showing up. If you were required to pay debts for three years following the bankruptcy, you might still be within the time period in which the credit bureaus report the amount paid and the origin of the debt. In your case, the origin of the debt was the bankruptcy and the last payment might have been several years later.

When you take out a mortgage loan for 30 years, the debt is shown on your credit for those 30 years and for a certain time after you have paid off the original debt. So that 30-year loan could be on your credit history for almost 40 years of your life. The 30 years that you had the loan and then the reporting period after you paid off the loan.

Ilyce R. Glink's latest book is "100 Questions Every First-Time Home Buyer Should Ask: With Answers from Top Brokers from Around the Country" If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce's Web site, www.thinkglink.com.)

 

 

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Ilyce R. Glink's latest ebooks are "Save Your House From Foreclosure" and "The Clutter Collector: How to Get Rid of Clutter Everywhere In Your House," which are available at her Web site, www.thinkglink.com. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 am-1 pm EST. You can also write to Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022

 

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