Q. My husband lost his job, and we could not afford house payments in addition to our medical bills. At the end of 2010, we had a short sale. We found a buyer and the lenders agreed to forgive a small amount on our primary mortgage and a large amount for our home equity loan. Otherwise, we couldn't have sold our home.
My question is this: Will we owe income tax on the money we never repaid, or is the IRS lifting its taxes on debt forgiveness on second mortgages also?
A. Congratulations on working out a solution with your lenders so you could clear your home of liens and sell it.
The IRS usually considers money you've borrowed and then never paid back taxable income. In today's difficult market, though, they're making an exception for mortgage loans. Through 2012, no tax is due on forgiven debt if your own home was pledged as security for that loan.
A home-equity loan is really a second mortgage, and it sounds as if your home was used as security for it. So both your mortgages should qualify for the special treatment. The limit is for forgiven debt up to $2 million (or $1 million, if filing separately) so I expect it will cover you.
Q. Years ago, my son's first wife died, and he has since remarried. She had three children from previous marriages, and her name was on the deed. She left no will. When my son went to pay his taxes on the property recently, he was told he could not remove her name from the deed without a quitclaim from the children. And who knows where on earth they are?
What should he do? He wishes to put his present wife on the deed.
A. Your son's situation is a perfect example of why a lawyer should always be consulted when someone dies. No matter how simple the estate, there may be something that should be attended to at that point.
It would have been much simpler and less expensive, legally, to clear the matter up when his wife died. And legal help is what he needs now. There's no other way to straighten things out. A law firm may be able to find those stepchildren. My guess is it may cost your son something to persuade them to sign off on their claims to part-ownership.
Q. Would the home-sellers tax break apply if someone didn't use it while he was alive? If someone died and left his home to two sons who didn't live there, could the sons take $250,000 each in profit when they sold the house -- without owing capital gains tax? Or could the estate claim this credit?
A. Neither the estate nor the sons could use the home-sellers tax exclusion when they sold the house, but on the other hand, they wouldn't need to. Today's estate tax laws are fairly temporary, but at least they apply right now.
As of today, the estate or the heirs could receive a new "stepped-up" cost basis for the property: its current value. When they sold, they probably wouldn't have any taxable profit over that amount.
Q. I had been trying to sell my house for 15 months. I reduced the price down to where if I accept anything less, I would be selling at a loss. After doing some research on rentals, I came to find out that I could rent it out for the same amount as my mortgage (and even for a profit if I refinanced).
After placing an ad I got a huge response, and the first couple to look at my place agreed to rent as soon as I could move out. When I went to the mortgage company, explained the situation, and applied for a second mortgage, they said I couldn't qualify -- even with my grandparents cosigning. I legitimately had a good property with great tenants and great intentions! Please help!
A. I'm afraid there's nothing I can do. Even experienced investors are finding it hard to get loans these days. Lenders will count as income only part of the rent you can expect to collect. And that would be for a property where you had substantial equity -- value over and above what you presently owe.
Lenders also consider the experience factor. If you had a huge response, maybe you're not charging enough. If you rented to the first couple you met, are you sure they're "great tenants?" Did you run a credit check? Do you have a signed lease approved by your lawyer? A security deposit? Have you allowed for possible vacancies, repairs and maintenance?
• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.
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