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Paying off condo might not be best plan for 74-year-old owner

Dear Benny: I am 74 years old and have been contemplating paying off my condo mortgage.

The remainder of my condo loan is $98,000 at 6 percent. Can you help me through this?

On the surface it seems like a good idea, but I’m not aware of all the particulars. I am in good health and will not need the $98,000 in the near future. –Dee

Dear Dee: While you say your health is good and you will not need the money in the near future, what about the far future? There is no guarantee that your health will remain good.

I am concerned about people who are “house-rich and cash-poor.” They have a house that is paid in full but cannot afford the upkeep, the real estate tax or even the insurance.

Do you get any tax benefits from your mortgage? Can you deduct the mortgage interest? I recognize that this will not be a lot of money, but it is a factor that should be in your thinking.

Now I know that readers will say, “Hey, Benny. She is probably getting less than 1 percent on that $98,000 and paying 6 percent interest, so why shouldn’t she just pay it all off?”

Yes, that’s a good argument, but if there is any possibility in the future that you will need that money, why take the chance of paying off the mortgage?

Keep in mind that down the road when you need the money, it may be difficult — if not impossible — to refinance. Lenders may look at your income and your age and decide that you are not a candidate for a refinance.

But let’s be positive. What if you pay off your mortgage and take out a home equity line of credit, or HELOC? Talk with your lender or your local bank about this. Most banks will either not charge you for obtaining such a loan, or the charge will be relatively small.

With a HELOC, you have a checkbook in your desk drawer. When you need the money, you just write a check and then, and only then, are you charged interest on the amount of money you have withdrawn.

Alternatively, you can pay off the outstanding mortgage and consider obtaining a reverse mortgage. Recent developments at the U.S. Department of Housing and Urban Development have dramatically reduced the upfront costs for reverse mortgages. You can either take a lump sum now or get a monthly or quarterly check from the lender.

A reverse mortgage should not be obtained until you carefully do your research. Check with organizations such as AARP, which has very good information about these loans on its website, www.aarp.org.

There are significant pros and cons to this, and you must educate yourself carefully before going that route.

Dear Benny: I own a condo, which I have never lived in long enough to qualify for a capital gains tax exclusion.

I bought the property originally for $175,000. My son rented it from me for several years, but I continued to pay the mortgage, taxes and insurance.

Two years ago, I added him to the deed, and we understand that my original basis now becomes his as well, plus whatever we both spent to improve the property. However, he now pays the mortgage, taxes and insurance.

Can this be interpreted as a sale? When we decide to sell the property at some future time, will he be eligible for the exclusion? –Carolyn

Dear Carolyn: In order to qualify for the up-to-$250,000 exclusion of gain, or up-to-$500,000 if you are married and file a joint tax return, you have to own and live in the house for two out of the five years before it is sold.

Because you did not live in the house, you cannot qualify for any exclusion. But when your son will have owned and used the property for a full two years, he should be able to claim the exclusion.

And because the tax code does not limit the exclusion for partial owners, I am of the opinion that he would be eligible for the full exclusion.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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