Q&A: Here’s why timeshares are a bad investment

Dear Liz: About two years ago, I lost my timeshare because of financial hardship. I paid off the mortgage but after my divorce I missed paying the annual fees. Is there any way I can regain it, or can the company just take it like they did? Also, is it worth it to try to get it back? I think so because it is the only thing I own.

Answer: Please consider investing your money in an asset that can gain value over time. Timeshares don’t.

Timeshares give you the right to use a vacation property for one week each year. They aren’t an investment. In most cases, timeshare owners are lucky to get 10 cents on the dollar when they try to sell their interests.

Sites such as Timeshare Users Group and RedWeek are filled with ads from people trying to sell their timeshares for $1, and some will even pay others to take timeshares off their hands, perhaps by prepaying a year or two of maintenance fees. Those fees average about $900 a year but can top $3,000 on high-end properties. Resorts damaged by natural disasters or older properties that are being improved also may charge “special assessments” that can be hundreds or thousands of dollars more.

As you discovered, timeshare resorts can take back your interest if you don’t keep up with those fees. You also could have lost your timeshare if you hadn’t been able to pay the mortgage. (In general, it’s not a good idea to borrow money to pay for vacations or other luxuries, and that includes timeshares. The high interest rates charged by most timeshare resort developers make borrowing an even worse idea.)

In addition to taking your timeshare, the developers may have sold your delinquent account to a collection agency that reports to the credit bureaus. Those collections could damage your credit scores.

You could ask the resort developer if you can get the timeshare back, but you could just face the same problem again down the road. One of the biggest problems with timeshares is that there typically is no easy exit. Those annual fees and special assessments are due as long as you own the timeshare. You may not be able to find a buyer if money is tight or you’re no longer able to use it.

If you really loved vacationing at that particular resort, you probably still can. Owners who can’t use or trade their timeshare weeks often rent them out on the sites mentioned above, sometimes for less than the annual maintenance fee. Renting could be a much better deal than tying yourself to a timeshare that could become unaffordable.

Q&A: When to keep a mortgage into retirement years and reasons you might want to pay it off

Dear Liz: My husband and I have no debt other than the mortgage on our home. My husband will retire in three years while I will continue to work. (I will have to pay for healthcare at that time, as I currently receive my benefits through his employer.) My husband insists that we pay our mortgage off before he retires. The mortgage balance is $59,000 now. We are able to do this, however, I am concerned that we will have no tax deduction whatsoever if we do. Who is correct?

Answer: You may have received some tax benefit in the past for your mortgage. After last year’s tax reform, it’s unlikely you’ll get any tax break going forward.

You have to be able to itemize your deductions to write off your mortgage interest. Now that Congress has nearly doubled the standard deduction, few taxpayers will have enough deductions to make itemizing worthwhile.

Even before tax reform, though, many homeowners got little or no tax benefit from their mortgages. They didn’t pay enough mortgage interest to make itemizing worthwhile, or their itemized deductions barely exceeded the standard deduction. The homeowners who got the biggest benefit were the ones with the largest mortgages. Even people with big mortgages tend to pay less interest over time as they pay down their loans.

Keeping a mortgage just for the tax break is kind of shortsighted, in any case, since you’re only getting back a fraction of what you pay out. For example, if you were in the 25% tax bracket, each dollar you paid in interest reduced your taxes by just 25 cents.

The best arguments for keeping a mortgage have to do with liquidity and investment returns. You shouldn’t pay off a mortgage if it means most of your money is tied up in your home, and if you don’t have enough other assets to cover emergencies and to generate future income. Also, some wealthier people opt to keep a mortgage because the loan is cheap, and they can make better returns on their money elsewhere.

Most people are better off without debts in retirement, though, so if you can pay off your home loan without compromising the rest of your financial life, you probably should.

Q&A: Here’s why two siblings who inherited mom’s house should prepare for an ugly family feud

Dear Liz: My mother left her house to my brother and me. He wants to use it as a rental property. I have no interest in being a landlord or in ownership. He doesn’t want to buy me out, so I’d like to sell my half interest. What are the tax issues I need to prepare for, and does my brother need to sign any documents?

Answer: You should first prepare for an ugly family feud. If the property hasn’t been distributed yet, you’ll face a probate or trust contest over the house, says Jennifer Sawday, an estate planning attorney in Long Beach. If you’ve already inherited the home, you would need to go to court to file a real estate partition action. Either way, a court action typically forces a sale or arranges for your brother to buy you out before dividing the proceeds — minus all the attorneys’ fees, of course. (This is not a do-it-yourself situation, so you’ll both need to hire lawyers.)

That may be the best of bad options if your brother won’t see reason. Being a landlord involves considerable hassle and liability. You shouldn’t be forced into such a business — or any business — with a family member.

You can use the threat of legal action as a bargaining chip, since you both will net a lot less from your inheritance once the court gets involved. It makes much more sense for your brother to agree to a sale or get a mortgage to buy you out. Let’s hope he comes to that conclusion as soon as possible.

Q&A: Death means capital gains take a holiday for heirs selling a house

Dear Liz: I am in my mid-80s and in declining health. I want to advise my beneficiaries about possible taxation on the sale of my home after I expire. I bought the place in 1995 for $152,000. It now has a market value of about $400,000. The issue is whether that gain is taxable upon the sale after my death. I also have a $57,000 long-term capital loss carry-forward in my income taxes, which is being written off at a rate of $3,000 each year.

Answer: The gain in your home’s value won’t be taxable at your death. Instead, the home will get what’s known as a “step up in basis.” That means its new value for tax purposes will be its market value when you die. So if it’s worth $400,000 when you die and your heirs sell it for $400,000, no capital gains taxes will be owed on the sale.

The news isn’t so good for your capital loss, however. Any unused carryover expires at your death and can’t be transferred to your estate.

As you know, capital losses — losses on investments or assets that you sell — can be used to offset capital gains and reduce your tax bill. If your losses exceed your gains, you can offset up to $3,000 of ordinary income each year. Any capital loss remaining after that can be used the next year in the same way: first to offset capital gains, then to offset up to $3,000 of ordinary income.

Often when taxpayers have such a loss, they’re encouraged to sell investments that have increased in value to help use up the loss faster, but you should talk to your tax pro and estate planning attorney to see if that makes sense in your case.

Q&A: How to get results when you complain to your mortgage company

Dear Liz: Last year my mortgage was sold to another company. I didn’t know that I had a new loan number, so my automatic payments weren’t posted properly. With the help of my bank, I was able to sort this out but not before the new company reported me as delinquent to the credit bureaus. I have never been late with a payment in 15 years.

I pleaded with the company to remove the delinquency from my credit report, but they declined, saying their records show that they fulfilled their obligation by notifying me that they are my new lender. Do I have any recourse and what are my options in getting this delinquency removed from my credit report?

Answer: You can try disputing the delinquency with the credit bureaus, but that is a highly automated process. The company may check its records and respond to the bureaus as it did to you, refusing to remove the black mark. It’s worth a shot, but far from guaranteed.

You most likely will need to get to the right human being to help you. Sometimes when you run into a brick wall with customer service, you can turn things around by appealing to someone’s expertise. Asking the customer service rep, “If this happened to you, what would you do to fix it?” may get you pointed in the right direction.

Of course, you may have been talking to a call center worker with little training and even less authority. If that’s the case, ask to speak to the manager. You might also write a letter to the company’s chief executive, asking directly for help.

Another option is to involve regulators. Filing a complaint with the Consumer Financial Protection Bureau or your state attorney general may get results.

A single missed payment can knock more than 100 points off good credit scores, plunging you into the “average” category and causing you to pay more for such things as credit card interest, insurance and cellphone coverage. It may take considerable effort, but it’s worth fighting back.

Q&A: Reverse mortgages have improved but still require caution

Dear Liz: You’ve written about the potential financial flexibility and options for preserving quality of life for seniors by using a reverse mortgage line of credit. I believe there is a great need for much more cautionary advice regarding reverse mortgages.

Someone I know entered into a reverse mortgage and the consequences have been disastrous. She was barely past the minimum age of 62 when she got the loan and took the lump sum option, only to spend it hastily on various purchases and debts.

Having no income other than Social Security, and almost nonexistent savings, she faces many years of figuring out how to pay property taxes and ongoing maintenance costs to avoid foreclosure. So although she has her home, it’s a precarious situation from year to year. She also no longer has an asset that could be used for long-term care or other expenses because the reverse mortgage makes it unlikely the owner will receive any leftover proceeds after paying off the lender.

Answer: You didn’t say when your friend got her reverse mortgage, but the rules for lump-sum payouts have been tightened under the Federal Housing Administration’s Home Equity Conversion Mortgage program.

In the past, borrowers could take 100% of the loan proceeds upfront. Today, only 60% is typically available in the first year. The total amounts that can be borrowed overall have been reduced as well. These changes were meant to shore up the program’s finances, but they also could lead to fewer situations like your friend’s.

That said, people should be extremely careful about encumbering their homes in retirement. Prospective borrowers have to meet with HECM counselors to discuss a reverse mortgage’s financial implications and potential alternatives, but they would be smart to also meet with a fee-only financial planner.

Q&A: Wife should get her name on deed

Dear Liz: My daughter, who is a stay-at-home mother of two, recently bought a home with her husband. They have been married seven years. I recently discovered that her name isn’t on the deed to the home. I don’t know why, but it doesn’t sound good to me. What are her potential issues?

Answer: The issues depend on where she lives. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If your daughter lives in one of those, assets acquired during marriage, including a home, are generally considered community property owned equally by both spouses. Her husband, ideally, should place her on title via a deed to reflect true ownership or place it in a trust to provide for his wife. However, if her husband should die without bequeathing her the property, the home could go to probate proceeding, and the wife would have to provide proof that it was community property to receive all of it, says estate planning attorney Jennifer Sawday of Long Beach.

In other states, different rules apply. Typically assets held in one person’s name are that person’s property. If the husband has a will, he could leave the house to your daughter — or not. Should he die without a will, she could wind up sharing ownership of the house with others, such as children from a previous marriage.

Q&A: Selling a home you’ve shared with tenants

Dear Liz: I am 53 and own a home in which I live and rent out rooms. Every year I pay my taxes on the rental income and get to deduct depreciation.

How does this affect the taxes I will pay on the home when I sell it? Will I be able to claim the $250,000 exemption? I may live in this home until my death and leave it to my children. How would the rental depreciation affect their stepped-up basis and any taxes they might have to pay?

Answer: Renting rooms is similar to taking the home office deduction in the Internal Revenue Service’s eyes. In both cases, you have to recapture any depreciation, but the business use doesn’t affect your ability to take the home sale exclusion.

The home sale exclusion allows you to exempt from capital gains taxes up to $250,000 of home sale profit. (The exclusion is per owner, so a married couple potentially could exempt up to $500,000.) You’re eligible for the exclusion if you have owned and used your home as your primary residence for at least two years out of the five years before the sale. You will have to pay income taxes on the amount of depreciation you deducted over the years. That depreciation amount is added back as income on your tax return.

If the space you rented out had not been within your living area — if it were a separate apartment or retail space — then different rules would apply.

If you decide to bequeath the home at your death rather than selling it, your heirs won’t have to pay the depreciation recapture tax — or capital gains taxes on any appreciation that took place while you owned it. Instead, the home’s tax basis will be “stepped up” to its current market value.

If they sell it soon after inheriting it, they won’t owe much if any tax on the sale. If they hang on to it before selling, they’ll owe taxes only on the appreciation that took place while they owned it. If they move in and make it their primary residence, they too could qualify for the $250,000-per-person home sale exclusion once they have owned the home, and used it as their primary residence, for at least two of the five years before they sell it.

Q&A: You may be good with money, but if sister didn’t ask your opinion, butt out

Dear Liz: My sister and her husband are in their 80s. They are not in the greatest health but still able to live on their own. They’ve had some bad luck financially in the past. Last year they decided to convert part of their property to serve as a short-term rental. I questioned the advisability and legality of this. I was told they had checked and it was all right legally. They proceeded, but it wasn’t legal and their homeowners association shut them down. They have now decided to rent the space month-to-month through a property management firm as the HOA will allow rentals of one month or longer.

I shared my experience with rental property, which has been very mixed. Busybody that I am, I also provided information from a friend whose family had invested in rental property. My brother-in-law insists that he had a good experience many years ago with rentals. Am I wrong to call this a bad idea? Should old people try to recoup the money they put into their ill-advised initial rental attempt with another ill-advised rental attempt?

Answer: The answer to both questions is most likely, “It’s none of your business.”

You didn’t indicate anywhere in your letter that your sister or brother-in-law had sought your opinion. You also didn’t mention any signs that they may suffer from diminished capacity or any other cognitive problem that would require intervention.

What you did do was call yourself a busybody. You might want to reflect on what causes you to repeatedly offer advice to people who aren’t interested in hearing it. Those of us who are “good with money” often feel justified in lecturing those who aren’t, or who have had (as you put it) bad luck financially. Our advice is seldom welcomed, though, and can be more about making ourselves feel superior than really helping someone else. Giving unsolicited advice is actually a terrible habit, and a hard one to break since it’s so deliciously enjoyable (although not for the recipient, obviously).

If we want our opinions to truly matter, we should be more sparing with them. We can start by proffering advice only when it’s specifically requested. When we’re tempted to make an exception to this rule, we should do so only after careful thought and preferably after consulting with a friend who already is in the habit of keeping her opinions to herself. We’ll likely discover what she’s already learned, which is that our meddling usually isn’t appreciated.

Q&A: Get your credit score ready for the home-buying process

Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.