QUESTION: We own a three-bedroom, one-bathroom home in a nice neighborhood where the schools are excellent. Our problem is we have three children and our home is too crowded now that they are getting older and each wants their own bedroom. We have looked at larger homes but they seem so expensive in the school district where we want our kids.
The larger new homes are out in the boondocks and the schools there are overcrowded, so we have ruled out a brand-new house. Our alternative is to add on a bedroom, bathroom, and family room to our present home. But we realize the construction would be very inconvenient, and the cost estimates seem so high. If we add on to our present home, any suggestions on the best way to finance the improvements?
ANSWER: Perhaps you've noticed the boom in home remodeling. Many other homeowners have come to the same conclusion that it is usually best to remodel and add on to a presently owned home rather than buy a larger one. Since you like the location and school district of your current home, I agree you will be making a wise decision to upgrade it.
Yes, there will be considerable inconvenience during construction. But an experienced and thoughtful contractor can minimize the disruptions. Be sure to get bids and client references from at least three remodeling contractors.
Don't necessarily go for the lowest bid. Check the quality of their work and talk to their previous customers to see what they liked best and least about each contractor.
As for financing the construction, you can either use a home equity loan or refinance your current mortgage with a new first mortgage after the work is completed.
The cheapest and easiest finance choice is usually to obtain a home-equity credit line to finance construction. After the work is finished, then you can decide if you want to refinance the first mortgage with a new one, possibly at a lower interest rate.
'Over 55' Exemption Can't Reduce New Basis
Q: I want to sell my expensive home and buy a less costly property, and I want to use the "over 55 rule" $125,000 tax exemption to reduce the basis of my new home. I can sell my current home for about $350,000 and I want to buy a replacement for around $300,000. Can I use the $125,000 exemption to reduce the basis on my new home?
A: No. I am not aware of any method of doing so. You can use your once-per-lifetime $125,000 exemption by subtracting it from the net (adjusted) sales price of your old home. That would bring your $350,000 sales price down to $225,000. If you buy a replacement home costing at least $225,000 in this example, then your profit tax is deferred. But the basis of your replacement home is not reduced by the amount of your $125,000 exemption. Please consult your tax adviser for further details.
Elderly Can Minimize Down Payment Too
Q: You constantly harp on making a small down payment and getting a big mortgage when buying a home. Does that advice also apply to old folks? I am 74 and my husband is 79. We are both in good health and plan to buy a small home in central Florida near Orlando. Is there any place we can get a 20-year mortgage at our ages?
A: Yes, even retirees should make a minimum down payment and obtain a maximum home loan. Mortgage lenders cannot discriminate on the basis of age. They must judge your loan application on your income and credit history.
Even though you are unlikely to live to pay off a 30-year mortgage, if your income and credit justify it, you can obtain such a loan. Florida mortgage lenders are especially savvy to the merits of making loans to older people because the default rate is practically zero.
Aunt's Conditional Gift of Deed Proves Void
Q: In 1982 my aunt gave me the deed to her house. She told me to have it recorded after she died. Last month she died. I then recorded the deed at the court house. But the attorney for her estate says my deed is void because it wasn't recorded before she died. Is this correct?
A: To be valid, a deed must be delivered to the grantee unconditionally before the grantor's death. It appears the deed you received in 1982 was conditional in that you could not record it until your aunt died. That means the estate's attorney is correct and the house still belongs to your late aunt's estate.
However, if the deed had been delivered to you unconditionally and you had recorded it before your aunt died, then title to the house would be yours. Please consult a local real estate attorney for further details.
Cash Not Required to Retain Tax Deferment
Q: We were very fortunate to sell our home last year for cash. Now we want to buy a new house. The builder offers a plan with as little as 10% down payment. However, I am wondering if we have to reinvest the cash we received from our home sale if we are to avoid paying tax on our sale profit. Please clarify.