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Condo conversion refinance derailed by layoff

DEAR BENNY: We are three owners of a property in a nice neighborhood.

We own the property as tenants-in-common and have shared an interest-only loan since 2005. We are in the process of converting the property into three condominium units.

One of the owners lost her job last spring and is now self-employed. The other two owners’ employment status has not changed.

The loan broker we have been in contact with – for the eventual refinance into three individual mortgages – tells us that the owner who is now self-employed will have the hardest time getting a loan (it will be in the neighborhood of $1 million; the other two will be under $500,000) and will likely have to file her current tax return before she will even be considered by a lender.

The other two owners would like to refinance immediately.

Can the two owners go ahead and refinance and pay off their shares of the common loan and have their names removed from the loan, or do all three owners have to refinance at the same time? – Steve

 

DEAR STEVE: I am sure you never contemplated converting to condo when you first bought the property.

However, what should have been done at that time was to negotiate with your lender that, when you converted, the lender would agree to partial releases upon an agreed-upon payment as each unit was sold or financed.

In other words, your current lender has a loan on the entire property. When you convert to three units, the current loan remains on the books.

However, the lender may be willing to release each unit from the existing loan, but you may have to pay the lender up to 100 percent of the sales price on each unit.

You should talk with your lender to see if you can arrange for partial releases.

The two of you would own your individual units subject to your new loans. The third owner would still own her unit, which would be subject to the balance of the old loan, taking into consideration the amount that the two of you will already have paid down.

This may work, but the existing lender may still want the two of you to guarantee the loan. If that’s the case, you may have your own problems getting your refinance loans.

My suggestion: Can the two of you qualify to get a third loan to pay off the existing mortgage? Rent the third unit to your partner until she is able to buy it and get her own loan.

 

DEAR BENNY: I am a senior and have made my one, clear-thinking son executor of my total estate. And, as you advised, I am keeping my second home, which another son lives in, until I die to avoid capital gains taxes.

At my death, can this second home’s deed be transferred from son to son, or does this need an addendum to my will? Will I be exempt from capital gains taxes on both my homes? – J.W.

 

DEAR J.W.: I am confused.

If you do not sell either of your houses, and they are distributed after your death pursuant to your last will and testament, you do not pay any capital gains tax. You made no profit and, thus, no tax to pay.

I am assuming that you currently own both houses. If that’s the case, I strongly suggest that you retain a local attorney who will assist you in preparing your will. That document will spell out which house goes to which son, assuming that you want each of your sons to have one of the houses.

Is your wife alive? If so, does she have any interest in the house? Under most state laws, even if your will provides that the houses go to X and Y, a spouse can claim an interest in those properties.

I cannot provide specific legal advice, but since you do own two houses – and you clearly want to help your two sons at minimum expense to them on your death – you need to consult an attorney while you are still competent to make decisions.

 

KASS is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to benny@inman.com.

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