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Letter to the editor

Be careful when adding fiancee to title

By Benny Kass, Special to the Times
Published January 12, 2008

Q: I purchased a townhome in January 2005 with a very low rate, interest-only loan, and have been paying approximately 20 percent extra toward the principal each month. My fiancee moved in about 15 months ago and has been paying $600 a month. The monthly interest-only payment is $1,600. Recently we decided to double the monthly payment in addition to paying an extra $10,000 toward the principal to lower the interest portion of the monthly payment. My fiancee has asked about taking advantage of the interest deduction on her tax returns. What is the best way if any for us to divide fairly the interest toward our yearly tax returns? I am thinking about giving her a quitclaim deed with her name on it in addition to mine. Is that a viable option?

A: Even if your fiancee is put on title, since she is not named on the mortgage document, she will not be able to legally claim any deductions. According to the IRS, "to be deductible, the interest you pay must be on a loan secured by your main home or a second home."

The only way that she will be able to claim any deductions is for you to put her name on the title and refinance your existing loan. That may not be a bad idea, depending on whether your favorable interest-only loan will someday become an adjustable loan with much higher monthly mortgage payments. Too many people who obtained interest-only loans are now waking up to learn that their favorable loan will not last forever.

If you decide to put your fiancee on the title before you marry, I strongly recommend that you enter into a form of partnership agreement. This agreement would include provisions on what to do with the property should you decide to break up, what happens if one of you is not able to pay his or her share of the house expenses, and how to divide the proceeds should you decide to sell the house.

I also urge you to check with your lender and make sure those principal payments are going where you want. Sometimes homeowners faithfully make additional payments and find out later that they weren't applied to the principal as they intended.

Snowbird sense

Q: My wife and I, in our mid 60s, are retired and have no mortgage. Our property is valued at about $500,000. We have been thinking of living in a warmer climate in the winter and staying in our current home the rest of the year. My thought is to obtain a $200,000 reverse mortgage and buy a house in the South for cash. That would give us the flexibility of living at either house whenever we choose. Or we could rent it occasionally and use the proceeds to cover maintenance costs, taxes and insurance. What do you think of this plan?

A: Sounds very sensible to me. The reverse mortgage would enable you to borrow money without having to make monthly mortgage payments. You will have to confirm with the mortgage lender that your conditions are acceptable. Some reverse-mortgage lenders require that you live in the house full time.

If your lender will approve, I do have two suggestions. Regarding insurance, if your houses may be vacant for four to six months at a time, check with your carrier to make sure that you are not going to violate one of their requirements. Often, insurance companies balk at insuring vacant homes.

Regarding taxes, do you ever plan to sell your current home? In order to take advantage of the up-to-$500,000 exclusion of gain ($250,000 for single people), you want to make sure that you will have legally lived in the house for an aggregate two out of the previous five years before it is sold. Discuss your plans with your tax advisers before you sign any contracts.

E-mail Benny Kass at benny@inman.com.

[Last modified January 10, 2008, 17:35:44]