ASK BENNY!

 DEAR BENNY: Seven years ago, when my mother was 80, my husband and I purchased cooperative apartment shares in a senior complex for her to live in. Since at least one of the tenants had to be over 55, we put her name on the shares, as well as my name. The actual paperwork reads: " 'My Mother's Name'
or 'My Name' as joint tenants with right of survivorship and not as tenants in common."

If my mother needs to move to assisted living or a nursing home, will Medicaid try to get possession of this apartment? I've called the co-op's attorney, senior law offices here in Reno, Nev., and I've called private attorneys. No one can give me an answer.

One office suggested I call the Medicaid office. As much as I would like to, I think that might give Medicaid an opportunity to take what isn't hers. We used equity in our home to purchase this apartment. My mom lives on Social Security and could never afford this apartment.

One lawyer suggested the co-op "reconvey" the share back to my name, but their bylaws require that whoever is on the deed live there.

Any ideas? Are we safe in keeping this, selling it and keeping the monies, or will Medicaid take it? --Penny

DEAR PENNY: This is a complicated question and I am surprised that the senior law offices were unable to assist. There are a number of "elder lawyers" throughout the country, and you can locate them on the Web. I searched "elder lawyers" and found a number of Web sites that should be of assistance to you.

Generally, however, Medicaid (which is administered by the state, with each state having its own rules) does not "get possession" of property. But if your mother applies for Medicaid, I assume she will need to disclose her interest in the co-op as an asset.

It is possible that the state will take into account the fact that she is not an "equitable" owner of the property (as she did not contribute to the purchase price of the property) and simply disregard the asset. But even if she is considered to be an owner for Medicaid purposes, the state may impose only a lien on the property rather than require it be sold.

In fact, if the state considers the co-op interest an asset of your mother, it wouldn't require her to sell it, but could deny her benefits until her assets, including her interest in the house, were spent down to whatever the threshold is in Nevada.

Many states allow a number of exceptions. For example, if a disabled family member (or a spouse, which I assume there is none) is living in the property, the Medicaid applicant would qualify for benefits and a lien would be imposed on the applicant's share of the property in the amount of any benefits paid -- but the benefits would need to be reimbursed when the property is sold or the disabled person or spouse dies.

This is a highly specialized area of law, and not all attorneys understand the rules or the law.

DEAR BENNY: I have a question about escrows for taxes and insurance. Let's say I am buying a home and last year's tax bill was $1,200 (or $100 per month). Can the lender set up escrow collecting $150 per month for taxes? --Nate

DEAR NATE: My mathematical skills are limited, but the answer to your question is no. According to the federal Real Estate Settlement Procedures Act (commonly known as RESPA), a lender who collects money in escrow for real estate taxes and insurance can have only a two months' cushion on an annual
basis.

So, if the bank is collecting $150 per month, annually that comes to $1,800. A two-month cushion allows you to collect only $1,400, or $116.66 per month.

But depending on when settlement takes place, the lender does have the right to collect sufficient funds (plus two months extra) to make sure that it can pay the taxes and insurance when they become due.

Let's take this example: You settle (go to escrow) on May 15. The tax bill in your jurisdiction must be paid by Sept. 30, 2010, but is applied from January 2010 through December 2010. Because mortgage interest is calculated in arrears, your first payment will due in July. (Note: The lender will charge you interest at closing from May 15 to the end of that month.)

By the time the real estate tax bill has to be paid, you will have made three payments in escrow (July, August and September). But the lender needs a full 12-month payment. Accordingly, the lender has the right to charge you -- at closing -- nine months' escrow to collect all the money needed, plus two months' cushion; in other words, the lender can charge you at closing for 11 months' escrow.

Here's a consumer protection suggestion: Because too many lenders often do not make the tax or insurance payments on a timely basis -- or in some cases do not make the payments at all -- omeowners should send their lender a demand letter, once a year right after the taxes or insurance payments are
due, requesting proof that those payments have, in fact, been made.

For those jurisdictions where this information can be found online, you should learn how to access this from your local government's Web site.
DEAR BENNY: My 42-year-old son will move home next month. I am 65 and thinking of downsizing. I would like to place him on the deed when he moves in and after two years, sell my home. Since he is on the deed, will up to $500,000 be tax exempt? I know that there could be problems with this arrangement. Is this possible and what are the drawbacks with this arrangement? - Richard

DEAR RICHARD: First, what do you mean that you will "place him on the deed"? Will you be selling the house to him, or just adding his name to the deed? If the latter, there are potential tax complications. This would be treated as a gift. The law is quite clear that the tax basis of the person giving the gift (the giftor) becomes the tax basis of the person receiving the gift (giftee).

For example, let's say you bought the house many years ago for $100,000 and now it is worth $500,000. Your tax basis is $100,000, excluding any improvements that you may have made along the way. If you give half of the house to your son, his basis becomes $50,000. If you then immediately sell it for $500,000, your profit is $200,000 (half of $500,000 less your basis). If you have owned and lived in the house for at least two years, you can exclude the entire gain and pay no tax. But your son did not live in the house for two years. His profit is also $200,000, but he would have to pay the IRS $30,000 (based on the current 15 percent capital gains tax rate) plus any applicable state or local tax.

Now let's look at a sale after both you and your son have owned and lived in the house for two out of the five years before sale. You sell it for $600,000. The tax basis for each of you is $50,000. You have thus made a
profit of $250,000 each. In this scenario, both of you can claim the $250,000 exclusion of gain and pay no tax.

You have raised an interesting plan, but do the numbers before taking any action.

DEAR BENNY: My father passed away in January 2008 and I have inherited his townhouse. He had an existing mortgage, and I am continuing to make the mortgage payments. I have not notified the mortgage company. I am unable to obtain financing for the home in my name at this time. I have already been
turned down twice. Does state law allow me to assume this loan, or if the finance company finds out, can it pull the loan? I don't want to lose the house. There was a will (I was the personal representative and sole
beneficiary) and I had an attorney prepare the deed, which has been recorded in my name. It was my father's wish that the house be mine upon his death. --R.N.

DEAR R.N.: Please relax. State law has nothing to do with this. Federal law -- called the Garn-St. Germain Depository Institutions Act of 1982 -- protects you. This law, among many other matters, specially addressed your
issue. According to that Act, a lender "may not exercise its option pursuant to a due-on-sale clause upon ... a transfer to a relative resulting from the death of a borrower."

Most mortgages (usually called "deeds of trust") contain a due-on-sale clause. That means that if the property is transferred to anyone, the lender has the right to call the entire loan. The purpose of such a due-on-sale
clause makes sense. If a lender makes a loan with a low interest rate -- say 5.5 percent -- and interest rates rise significantly, the lender does not want another person to step into the shoes of the original borrower and
continue making payments at the original low rate.

But Congress recognized that the due-on-sale clause was unfair to many eople, especially in situations such as yours where you inherited the our lender a copy of your father's death certificate, and merely advise that you will be taking over the mortgage payments. There is absolutely nothing that the lender can do to hurt you.
 
DEAR BENNY: There appears to be much confusion on the taxation liability of the funds on the sale of a house. I purchased a home for $300,000 in 2000 and will be selling it for $800,000 this year. I have lived in the
property for the full duration and file joint tax returns with my wife. I have been informed that I will be eligible for the $500,000 tax exemption, and must pay taxes on the balance of the sale ($300,000) even though I will be
purchasing a new home for $400,000. I was always under the impression that $500,000 was tax exempt (joint filing) against the profit and any further funds from the sale were tax exempt as long as I purchased another property for my primary residence of equal value or more. ? Peter

DEAR PETER: Let me try to clear up any confusion you may have. If your home cost you $300,000 -- ignoring any improvements you may have made over the years -- and you sell it for $800,000, you will have made a profit of $500,000. The law states, very clearly, that if you have owned and lived in the house for at least two years out of the five years before it is sold, and if you are married and file a joint tax return with your spouse, you can exclude up to $500,000 -- which in your case is all of that profit. (If you are single, the exclusion is limited to up to $250,000 of your profit.)

Congress abolished the old "rollover" rule in the 1990s. That rule stated that you do not have to pay any capital gains tax if, within either two years before or after you sell one house, you buy another one whose value is
equal to or greater than your former property.

But that's no longer the law. From your example, it appears that you will be able to exclude all of your profit and not pay any tax.

There is one caveat, however. Let's look at this example. In 1990, you bought your first house for $100,000. In 1995, you sold it for $300,000 and bought your present home for that same amount. In those days, you were
eligible for the "rollover," which meant that while you did not have to pay any tax on your $200,000 profit, the tax basis of your new house (which you bought for $300,000) is reduced by the amount of your profit.

Thus, even though you paid $300,000 for your present home, your tax basis in our example is only $100,000 ($300,000 minus $200,000). So if you sell your house for $800,000, for tax purposes your profit will be $700,000 ($800,000 minus $100,000), and while the first $500,000 will be exempt from tax, you will have to pay tax on the additional $200,000 profit.

Talk with a financial advisor about your specific situation.
DEAR BENNY: We are the trustees of a $100,000 three-year interest-only note secured by a deed of trust on a property. The interest rate is 5.5 percent. The beneficiary has offered a discount for us to pay off the note. What would be a normal discount for such an offer? We are still in the first year of the note. ? Betty

DEAR BETTY: First, I am confused. When you borrow money and the loan is secured by a deed of trust (called a mortgage in some parts of the country), the lender appoints trustees. These trustees have the power to sell the property at a foreclosure sale if you are in default on the loan. The trustees also have the authority to release the trust from land records when you completely pay off your loan.

So, I am assuming that you are the borrower -- and not the trustees.

Everything in real estate is negotiable, so I would try to pay as little as you can get away with. However, unless your lender has other opportunities for the money (at a rate of return of more than 5.5 percent), I doubt
that it will want to discount this too much.

To my knowledge, there is no formula to determine a proper and appropriate discount.
Disclaimer: Benny L. Kass is a practicing attorney in Washington, D.C. and Maryland. No legal relationship is created by this column. Consult with your tax and legal advisers. NEW ARTICLES WILL APPEAR EACH MONTH.