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Beware of 'force-placed' hazard insurance

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POSTED February 16, 2012 9:06 p.m.

DEAR BENNY: My wife and I closed on a short-sale house in Florida back in 2010. We paid "in full" the homeowners and flood insurance even before we took title to the property. Once we became the owner of the property, confusion started when the insurance agent apparently (and incorrectly) advised the lender that we did not have the necessary insurance coverage.

As a result, the lender advised us that it force-placed an insurance policy at a premium cost that was considerably higher than what normal insurance costs.

We are trying to resolve this amicably, but may have to file suit if it can't be resolved. --George

DEAR GEORGE: First, when dealing with national lenders (such as the one you have) I have often found that a letter to the Office of the Comptroller of the Currency assis

I am not sure how I can respond to your situation, as you may choose to file a lawsuit to resolve your issues. You may have a good case against the insurance agent for negligence, but your lawyer will have to make that decision.

However, I wanted to use your issue to discuss "force-placed" insurance.

Oversimplified, every mortgage lender requires its borrowers to maintain hazard insurance. If, for example, the property burns down -- or is hit with a tornado -- the lender wants to make sure that the insurance coverage will pay off the existing loan.

There is an interesting issue as to the amount of coverage that lenders can legally require. For example, if your home is worth $500,000 but your loan is only $250,000, one would think that all you need to satisfy the lender is $250,000 (although that may be a long-run foolish decision should your house burn down).

Apparently, different states have different legal requirements, so discuss this issue with your attorney. However, at the very least, you need full replacement insurance coverage.

Back to force-placed coverage: If you do not continue to carry your own hazard insurance, your lender will obtain it for you -- i.e., it will "force" insurance on your home at your expense. And, be warned: The cost of this coverage will be considerably more expensive than if you purchased it on the open market.

There are many abuses by lenders in this area. In fact, I have just learned that agencies in New York state have started investigating companies that underwrite and sell forced-place insurance.

Bottom line: Make absolutely sure that you do not let your home (hazard) insurance lapse.

DEAR BENNY: My mother is 89 and has been in a nursing home for almost five years. I am contributing to the cost of her care. I have two questions:

•How do I transfer the title at her death? I have her old will done in the 1960s naming me as the heir.

•Can the money that I have contributed over the years be deducted from the sale of her house?

This is the only asset she has. --Ruth

DEAR RUTH: Let me answer your second question first. You are still not the owner of the property and accordingly, you cannot take any deductions for the moneys you spent -- even if they significantly improved the house.

If the house were sold to a third party, you would be able to recover some of your investments. There is a statute of limitations in your state that would limit how far back you can claim reimbursement. You will also need adequate proof such as receipts and invoices.

But if you will intend to keep the house after your mother dies, your question would be irrelevant. You will be able to take advantage of what is known as the "stepped-up basis." This means that the value of the property on the date of death becomes your tax basis.

Let me explain: Even if your mother paid $100,000 for the house many years ago, it is valued at $500,000 on the day of death.

Thus, $500,000 is your tax basis. Should you decide to sell for that amount, you would not have to pay any capital gains tax. So, in my opinion, it really is unnecessary to be concerned about the moneys you have invested.

Turning to your first question, the answer depends on the laws in your state. If probate is required, the person appointed as the personal representative (called executor in some states) will prepare and record a deed into your name after probate is closed. You have to discuss your situation with an attorney in your state.

DEAR BENNY: I would like to know if it is possible to add my name on my mother's house title. She is 89 and I am 69, and we want the house to go to my grandson when we both pass away, but meanwhile she wants my name on the house. Can this be done without complications? --Maria

DEAR MARIA: It's very easy to add your name on title with your mother, but there may be tax complications. In order to determine capital gains tax, we use the concept of "tax basis," which means the original price of the property. If you have made major improvements over the years, that is called the "adjusted tax basis."

Let me give you this example: Your mother and father bought the house many years ago for $50,000. Assume for this discussion that no improvements were made. Your parents each had a tax basis of $25,000.

Your father died when the house was worth $100,000. Your mother received a "step up" in basis on your father's half of the property, which means that her basis is now $75,000 (i.e., $25,000 for her half and now $50,000 for her husband's half).

If your mother puts you on title to the house, that is considered a gift. And the basis of the person giving a gift becomes the basis of the gift receiver. So if she gives you half of the house, your basis will now be $37,500.

Let's further assume that the house will be worth $500,000 on your mother's death. Once again, you get the stepped-up basis, or $250,000 on her half of the property. Add that to your basis, and your tax basis is now $287,500.

If you decide to sell but have not owned and lived in the property for two out of the five years before sale, you will have to pay capital gains tax. Even if you sell it for $500,000, ignoring selling costs such as real estate commissions, you will have made a profit of $212,500 ($500,000 minus $287,500).

The current federal tax rate for capital gains is 15 percent, so you will have to pay the IRS $31,875, plus any applicable state and local tax.

But if you inherited the property on your mother's death, and sold it for the value at the time she died, you would not have to pay any tax at all. In other words, your tax basis is increased by the "step-up" concept -- i.e., the value of the property on the date of death.

In your case, because you want the property to go to your grandson, and assuming your mother is competent to know what she is doing, why not just have a last will and testament drawn up for your mother, whereby she specifically designates him to inherit the property?

I see no value in adding your name to title; it merely complicates matters. Talk with an attorney to get specific information relating to your own state laws.

DEAR BENNY: My daughter is half owner of a home with her boyfriend. She currently resides in the home with him. Their relationship has ended and she would like to sell the home and move to a place of her own. However, he refuses.

She needs the money from the sale of the home for a down payment on another place. The home is not fully paid off and there is a mortgage. This is an unhealthy living arrangement and she needs to move. What options are available to her? --Brian

DEAR BRIAN: First, I have to give advice to my readers so hopefully they can avoid the situation your daughter is in. When two unmarried people decide to buy property (whether they are gay or straight makes no difference) they must have a partnership agreement, spelling out in writing such items as:

•Who pays what?

•What happens if one partner cannot pay his/her fair share of the monthly payment?

•What happens if one partner wants out of the transaction?

Each partnership should consult an attorney, so that a final written agreement can be signed. Yes, there will be legal fees involved in negotiating and preparing the agreement, but I can assure my readers that such legal fees will be cheaper than my reader's daughter may have to pay now.

Brian, your daughter should talk with an attorney. If her former boyfriend is unwilling to reach an amicable settlement, her only option (in my opinion) is to file what is known as a "partition" lawsuit. Basically, the courts throughout this country have made it clear that if two or more property owners cannot agree when one wants out, the courts will force a sale.

From my experience, the only winners in such a lawsuit are the attorneys, the trustees who sell the property pursuant to a court order, and the speculators who end up with a good deal.

Hopefully, if your daughter threatens to file such a suit, her former boyfriend will get the message that litigation makes no sense.

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