REALTY MAILBAGNo tax break with simple sale of vacation homeBy ROBERT J. BRUSSwww.bobbruss.com Q: Since 1971, we have owned a vacation home about 35 miles from our primary home. Is it possible to avoid capital gains tax on our approximate $500,000 gain if we sell it? We have occupied it for summers and weekends for a total of more than 24 months during the 60 months before its sale. We never received mail there, nor licensed a vehicle there. We only have utility bills as proof of occupancy. My husband has cancer so the place needs to be sold. A: There is no tax break for the sale of a second or vacation homes, unless you want to make it a rental property before sale, then make an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater cost. Because your second home clearly was not your primary residence for at least 24 of the 60 months before sale, the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) is not available. Q: I am a retired realty agent who began my career in 1946. Recently, you wrote about ''interest-only mortgages.'' Back when I started selling homes, interest-only mortgages were strongly blamed for the many realty foreclosures during the Great Depression. The problem was that the value of the security often fell below the mortgage balance. That's why the FHA was created to provide monthly-amortized mortgages to slowly reduce mortgage balances. Do you think American borrowers (and lenders) are setting themselves up for a foreclosure debacle? A: No. Most of today's ''interest-only'' home mortgages, often called ''option mortgages,'' give borrowers the choice of paying interest only, fully amortized, partially amortized or negative amortization (less than interest only, with the unpaid interest added to the principal balance). After the first 10 years, most of these mortgages are ''recast'' and become fully amortizing for 20 years. More likely, the borrower will sell the home and pay off the mortgage. Interest-only mortgages allow first-time home buyers to get started building equity. They are also ideal for buyers who expect to stay in their homes less than 10 years. I hope today's interest-only mortgages won't have the same sad result that occurred during the Great Depression. Home mortgage money is much more abundant today than it was then. Also, Fannie Mae and Freddie Mac create secondary mortgage market liquidity that was not available in the 1930s. I'm not worried. Q: I am not yet 62 so I am not eligible for a senior citizen reverse mortgage. Is there any alternative to help me with my money problems? My house is free and clear, worth approximately $365,000. A: I am aware of no other mortgage program that eliminates monthly repayments to the lender. If you have adequate income, you might consider a home equity credit line, which costs nothing until you use it. For example, suppose you need to pay off credit cards and put a new roof on your house. A home equity credit line would be ideal. Most lenders should easily approve a home equity credit line for 50 to 75 percent of your home's market value if you have decent income and credit. When you become 62 (or later) you could then obtain a reverse mortgage to pay off the home equity credit line and be free of monthly payments as long as you stay in your home. Q: I want to thank you for recommending, several years ago, that condominium owners restrict the percentage of renters. That's what our homeowner's association did about two years ago. We changed our CC&Rs to prohibit additional rentals (although existing rentals were ``grandfathered''). At that time we had about 30 percent rental occupancy and the building was poorly managed. Gradually, we got our renter percentage down to about 10 percent today. The results have been amazing when we have owner-occupants who care about properly maintaining the property. Also, our building is more attractive to buyers and their realty agents so prices are rising nicely. A: It's good to hear the results of limiting rentals. The big problem of having more than 20 or 25 percent rentals is that many lenders either refuse to make new loans or they charge higher interest rates. The mortgage default rate in condo complexes with a high percentage of renters is greater than where most of the units are owner-occupied. Also, owner-occupants usually take better care of the facilities than do absentee landlords. Q: I own a house worth about $650,000, which I am renting to tenants. I owe only $62,000 on it. I also am buying my principal residence. Can I refinance and take $25,000 cash out of my rental property to make improvements on my primary residence? A: Yes. However, it will be much easier and far less expensive to obtain a home equity credit line on your rental. If you owe only $62,000 on the $650,000 house, it will be a ''no-brainer'' for your bank to approve a $100,000 or greater home equity credit line on that property. The interest rate should be prime rate (or lower) with no closing costs.
Robert J. Bruss is a California lawyer and licensed real estate broker. Leave your questions at www.bobbruss.com | 
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