DEAR BENNY: We are buying our first home and the lender has told us we will have to sign an affidavit that not only will it be our main home but that we will move in within 60 days after we take title. Although it will be our main home, we are not sure we will be able to meet their 60-day deadline. First, we plan on doing major renovation and our contractor said we really should not be in the house until the job was finished. Second, before we settle down, we are taking a three-week trip to China and Hong Kong.
Will this be a problem? We obviously don’t want to lie, but we don’t want to lose the loan or the house. – Stacey
DEAR STACEY: Absolutely, do not lie to your lender. Not only will you lose your loan – and presumably the ability to buy the house – but you could be charged with criminal violations which carry financial penalties and even jail time.
Moving in does not mean that you physically have to move all of your furniture into the house. Lenders are concerned that people say they will personally occupy the property so they can get a lower interest rate on the loan and only have to put down a small down payment. Typically the difference between a loan for a principal home compared to an investor loan can be 3-5 percent down compared with 10-20 percent down.
I believe you have “moved in” when you have your contractor start your renovations. And once you have moved in – via your contractor – you clearly have the right to take a brief vacation.
My suggestion: Talk with your mortgage lender and explain your concerns. Tell him or her that you will add language to the affidavit summarizing your concerns. In fact, draft the language before discussing your concerns and tell the lender you want a written approval of that language before you go any further on the loan application process.
Although I never guarantee anything, I am confident that you will not have any problems. Where problems generally occur is where the borrower does not want to raise the issues up front.
Good luck with the house and have a great vacation.
DEAR BENNY: I know that the capital gains tax was raised to 20 percent from 15 percent. Does that apply across the board to all taxpayers? – Kelly
DEAR KELLY: No, it does not apply to everyone. According to the IRS, “the capital gains tax rate usually depends on your income. The maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply.” Check with your tax advisor before you start the selling process.
Keep in mind that if your profit on the sale of your principal residence exceeds the maximum $250,000 or $500,000 gain exclusion, you may have to pay some capital gains tax. Make sure you have included in your calculations such things as improvements, real estate commissions and other expenses which will increase your tax basis and thus reduce your tax obligation.
DEAR BENNY: Our home was seriously damaged when the nearby river overflowed. Can we deduct our losses on next year’s income tax return? – Jen
DEAR JEN: If you follow the rules set by the IRS, the answer is yes. Some of the requirements are as follows.
First, if you have insurance coverage, you must file a claim for reimbursement. Keep in mind that most insurance policies require that you file your claim promptly after the damage, and often this means no later than 30 days after the damage. If you get insurance money, this will reduce your loss to be reported to the IRS.
There is a complicated formula for determining your loss. Go to IRS publication No. 547, entitled “Casualties, Disasters and Thefts,” free at www.irs.gov/publications. You can also call the IRS Disaster hotline at 866-562-5227 for special assistance. You will also need to get IRS Form 4684 (casualties and thefts) to report your loss, and you claim the deductible amount on Schedule A, entitled “itemized deductions.”
A suggestion: Talk with an accountant to assist you. You don’t want to make mistakes. It’s quite complicated.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: firstname.lastname@example.org.