By: By Benny Kass
DEAR BENNY: I am shopping for a new mortgage (I will refinance about $160,000 remaining on a condo worth about $300,000) and discovered my mortgage holder wants about $2,200 in closing costs. I just financed with this bank three years ago and have stellar credit. There seems to be no special benefit for refinancing with this lender. Their broker told me as much. I don't understand why they wouldn't want to keep a good customer. Any insight? --Janelle
DEAR JANELLE: I am not a defender of banks, but just because the bank performed a title search and a refinance three years ago does not mean that there are no clouds (i.e., impediments) on your title now. The bank must have clear title in order to make you a loan. Accordingly, it must again perform a title search. Additionally, there are administrative costs that have to be paid because the lender will have to look at your financial situation again.
There will also be closing (escrow) costs to the settlement attorney or title company.
My suggestion is to shop around. Rates are now quite low and mortgage money is becoming more available. Get some quotes from other lenders (including all costs), and then go back to your bank. Tell them you would like to work with them, but their costs are high, and you want them to give you a discount. If that works, go with your current lender. If not, you have the right to refinance with any lender of your choice.
DEAR BENNY: In addition to our primary residence, my husband and I own a commercial property that houses our business on the first floor and a residential apartment on the second floor. We currently rent out the apartment. The property is zoned commercial (C-4), dual use.
Before selling this property, is there any advantage to selling our primary residence and moving into the second-floor apartment for two years to establish residency? Since each floor is 1,250-square feet, would we then be exempt from paying capital gains taxes on that portion of the profit from the sale that represents the residence? And if so, in determining what portion is considered residential use, would the land that surrounds the building (approximately 4,000 square feet of concrete driveway/parking lot) be considered part of the commercial property although part of this area would be used for parking our personal vehicles as well as customer parking? --Pauline
DEAR PAULINE: Excellent suggestion. The law that allows homeowners to exclude up to $500,000 of gain is not a "once-in-a-lifetime" situation. It can be used over and over again. The only conditions are that the property must be owned and lived in two out of the five years before it is sold.
So, you can sell your current home and if you have owned and lived there for the requisite period of time, you can exclude up to $500,000 of your profit. In fact, if you have lived in that property for a long time, you can even move into the upstairs apartment now, so as to start the clock running on the second exclusion. However, be careful --if you cannot sell your current house within the next three years, you will lose the right to exclude the profit.
And here's another suggestion: When you sell the second property, you have the right to do a 1031 "like-kind" exchange on the first-floor business, and at the same time take the exclusion for the upstairs apartment. This would mean, however, that you will have to be a landlord for at least one or two years on the replacement property that you obtain through the exchange. Talk with your financial advisers about this.
As for allocation of the parking area, I really don't know how the IRS would treat this. I suspect, however, that if you carefully allocate the square footage for your personal usage as compared to the business operation, that calculation would be acceptable.
DEAR BENNY: Can you tell me what steps a board of directors/management company should take in the event a water-damage claim against the master policy is made by a condo owner? Should the board/management company investigate, take pictures of the damage, and stay actively involved throughout the claims process or merely turn the whole matter over to the insurance company and, in the event of litigation, its attorney? --Paul
DEAR PAUL: That's a very good question. On the one hand, the board -- which has a fiduciary duty to the owners -- must make sure that the claim is being processed correctly and honestly. On the other hand, boards of directors are volunteers, and must be able to rely on the professionals who are paid to assist, including management.
I think the answer lies somewhere in between doing nothing and being too proactive. Management should monitor the progress of the claim and make sure that the insurance carrier has taken pictures of the water damage. Management should also confirm with outside consultants that the amount of money the carrier is prepared to pay is sufficient to make the repairs. And since insurance companies usually have their own contractors to do the repair work, management should also periodically monitor the work to determine whether it is being done correctly.
And management should submit a status report to the board on a monthly basis.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.