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Use your home equity wisely

By HELEN HUNTLEY
Published June 18, 2006

Lots of people use home equity loans to pay off credit card debt, but did you know it's possible to eliminate the middle man?

You can charge that pizza or those new shoes directly to your home equity credit line. Some banks will allow you to keep charging right up to 100 percent of the value of your home.

Chances are your bank offers this convenience. You can find equity lines accessible by credit card at big banks such as Wachovia, Bank of America and SunTrust and tiny institutions such as Tampa's Railroad & Industrial Federal Credit Union, which launched a card this spring. In many cases, card users are required only to pay the interest on their purchases.

Maybe I'm old-fashioned, but making it that easy to spend your home equity seems downright dangerous. Our lack of spending discipline is a prime reason that for many of us home equity is the only significant savings we have. Many baby boomers say they are counting on that equity to help finance their retirements; there's even a new book out, Retire on the House. But what happens if most of the equity gets spent before retirement?

The average amount borrowed on an open-ended home equity loan or credit line rose from $77,869 to $95,690 between the first and fourth quarters of last year, according to the Mortgage Bankers Association.

I'm not against home equity lines. However, I think homeowners should be very cautious about putting their property on the line. Ordinary credit card debt can be wiped out in bankruptcy, but if you can't pay your home equity debt, you lose your home. That should be a sobering thought.

A sensible use of home equity debt is to add real value to your life by paying for a home improvement that increases the market value of your property or a college education that increases future earnings prospects.

Relying on home equity can be appropriate in time of crisis - getting you through a divorce or temporary unemployment, dealing with posthurricane repairs or replacing a wrecked car you need to get to work.

The danger lay in using home equity to bridge the gap between income and expenses in ordinary times. Paying interest on a pizza purchase for 20 or 30 years doesn't make sense no matter how you look at it.

So open a home-equity credit line if you want one, but stash the credit card that comes with it safely out of sight.

I filed for Chapter 7 bankruptcy in January 2000. It was discharged. Can I file again?

No. You must wait at least eight years after your discharge before filing a new Chapter 7 case.

However, you only have to wait four years to file a Chapter 13 case, which requires making payments on your debts. If you are trying to save your home from foreclosure, Chapter 13 can help. Also, people whose income is above the state median, based on household size, may be required to file Chapter 13. Discuss your situation with a bankruptcy lawyer if you think Chapter 13 might be right for you.

Ten years ago, I bought a rental property for $280,000, then did a 1031 tax-deferred exchange for a $400,000 rental property. Five years ago, I converted the new rental property to my personal residence. Will I qualify for the $250,000 tax-free principal residence sale exemption? I have never claimed depreciation on the rental. What will be my cost basis? Will it be $280,000 or $400,000?

You have asked a tricky question. According to the IRS, you will be able to claim the exclusion for sale of a personal residence, but with restrictions.

Your basis will be $280,000 minus the allowed amount of depreciation even though you did not claim it. You will owe tax on the depreciation, but then can apply your personal residence exclusion to the gain above that amount.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or log onto www.sptimes.com/blogs/money where you also can see other questions and answers.

[Last modified June 18, 2006, 05:58:59]