Stepfather’s reverse mortgage affects inheritance

Q: My stepfather took out a reverse mortgage loan last year for $130,000. His home is probably worth $250,000 and has long been paid off. He is 91 years old, and I know the reverse mortgage will let him keep the house and die at home.

This is a HECM reverse mortgage with mortgage insurance. So if no payments are made on the loan I assume mortgage insurance would not be a factor when he died.

When he dies, the house will be sold and the monies divided between the children of each spouse. Our mother had four children. So considering real estate agent fees, I would assume after the house is sold for $250,000, the $130,000 would be repaid and each family would get $60,000, with the four children receiving $15,000 each. Is this right? — D.

A: We can’t be sure how much the house will eventually sell for, and the sale expenses will include more than just broker’s commission. Depending on location and the provisions of the sales contract, there could be items like transfer taxes, legal costs of closing, something toward the buyer’s closing costs or even repairs required by the buyer’s lender.

After that, yes, the loan will be repaid, but that will take more than the original $130,000. Your stepfather may have had his closing costs added to the loan. And while he makes no payments, he still owes monthly interest charges, which are added to the amount borrowed. So are the unpaid premiums on the Federal Housing Administration mortgage insurance.

That insurance would come into play if the house couldn’t be sold for enough to cover the accumulated debt. It doesn’t sound as if that’ll happen in this case. There will probably be something left over for the heirs, but it’s not likely to be as much as you’ve figured.

Wants Financial Advice

Q: I have received some money from an inheritance. Any good ideas on where I could invest it for a decent return? — L., via

A: Nice to hear you’re thinking of investing rather than spending. But if you’re serious about this — if you’re really looking for financial planning advice from a real estate columnist who knows nothing about your whole situation — then you and your inheritance are in real danger.

You need to find a qualified financial adviser as soon as possible. Look for someone who has earned the designation of certified financial planner.

It’s time to do some reading. You’ll find a guide to locating the right person, and some sound advice, in the publication “Consumer Guide to Financial Self-Defense.” You can download it from the Internet. Another good source is the book “Personal Finance Workbook for Dummies.”

Deal Fell Through

Q: We recently entered into an all-cash contract to sell our home, and the selling broker received an earnest money deposit check when the contract was signed. Closing was set for the end of the month.

The buyers never showed up for the closing and when the check was deposited a week before that, it bounced. The sale obviously fell through, and we are disappointed.

Who is responsible for depositing the escrow check? Is it the sales broker who took the check or their closing attorney? — L. G.

A: It’s not clear how much time elapsed before that escrow check was deposited, and I don’t know what state you’re located in or what regulations apply. Of course, you should have been notified the moment the check bounced.

If you eventually sell for much less than that contract promised, I suppose you could go to a lawyer who specializes in real estate and ask whether it’s practical to sue anyone for what is known as the loss of the bargain. But mostly — deals do fall through all the time, and you might as well just relax. I wish you better luck with the next offer you receive.

Recapturing Depreciation

Q: You had a letter in the column that asked for advice on limiting capital gains tax on the sale of a rental property.

One detail regarding recapture and the “if you haven’t been claiming depreciation” scenario.

Rather than amending the past few years as you suggested, a taxpayer can file Form 3115 (Application for Change in Accounting Method) to elect a deduction for previously unclaimed depreciation for tax years beginning after Dec. 31, 2003 (10 years).

This would likely be more beneficial and would give them cover for more years than could be currently amended. CPAs knowledgeable on real estate and enrolled agents would likely know of this. —J. D.F., Enrolled Agent

A: From the original question, I suspected those landlords had been trying to do without professional help on their tax returns. Your letter shows why I advised them to consult a certified public accountant or enrolled agent immediately.

Edith Lank will respond personally to any question sent to or to 240 Hemingway Drive, Rochester NY 14620.


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