It is much easier to get an appointment now, but in some states, there are other requirements such as no application until after the counseling or as in CA, a 7 day cooling off period during which time the lender can do nothing on the loan. Right after HUD made the announcement that they were going to change the program in 9/2017, counseling agencies were jammed and appointments were harder and harder to get. If your counseling has not been completed, then you have to get an appointment and that is sometimes easier to do than others. Brown contributed to the content of this document.Every borrower has to have the HUD mandated counseling before we can do very much with your loan and many states also have counseling requirements. The capital gains tax must still be paid, regardless of the amount of equity in the home.ĭavid A. “The same sort of thing can occur if a property is bought with an ordinary mortgage and is frequently refinanced after that for the purpose of mining equity out of the home,” he says. This means that at the point of sale, it’s possible that there won’t be enough equity received by the seller after the loan is paid off to pay off the capital gains tax if the balance of the reverse mortgage is high enough, Brown says. Loans against the property are not taken into account.” “This tax liability is calculated by referring to the purchase price of the property, the cost basis, and the gross sale price. “If the property purchased with a reverse mortgage is sold before the death of the owner, after it appreciates $250,000 in value ($500,000 for a married couple), then there will be capital gains tax due on the sale,” Brown explains. He illustrated ways in which capital gains could interact with a reverse mortgage for purchase by constructing a hypothetical scenario. While it’s technically possible that the amount of tax due could exceed the value of the equity received in escrow, Brown contends that this is not particularly likely. If, however, the property is sold prior to death, then capital gains tax and state income tax is due on the sale price above the property’s purchase price, without regard to how much equity is still in the home due to the reverse mortgage.” “If the property is sold after the death of the owner, it gets a new cost basis, so no tax would be due. “The purchase price of the home is its cost basis,” Brown says. In an H4P transaction, Brown contends that it’s possible for capital gains to come into play if the property is sold in a specific situation. How can Capital Gains Tax interact with an H4P transaction?Ĭapital gains taxes are basically taxes imposed on the amount realized above the purchase price (or basis), and they typically apply to non-inventoried assets like property, stocks or bonds. The law essentially sets the property tax at 1% of the purchase price (plus any applicable local or county tax) and limits the amount that the tax can be raised over time. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.” (a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The most influential and significant portion of the provision is in its very first paragraph: While Prop 13 endured a challenge to its constitutionality in a case brought to the state Supreme Court, the court ruled that it was, in fact, constitutional in 1992. The measure was codified into the California Constitution as Article XIII A. On June 6th, 1978, a majority of voters in the state of California passed Proposition 13, an amendment to the state Constitution which effectively acted to reduce property tax rates on homes, businesses and farms by nearly 60 percent. Potential H4P borrowers may be curious about how capital gains tax can interact with the potential transaction, and potential borrowers who live in the state of California may also be curious about how 1978’s Proposition 13 can affect the process of engaging in a reverse mortgage for purchase. However, a down payment in a HECM for purchase transaction is typically higher than it would be for a regular home purchase that uses a traditional mortgage. By using the reverse mortgage along with the cash required to close, a new home can be purchased in a single transaction while taking out a reverse mortgage. How would capital gains tax and California’s Proposition 13 affect my ability to get a reverse mortgage for purchase? Prop 13 and the Reverse Mortgage for PurchaseĪ Home Equity Conversion Mortgage ( HECM) for Purchase, sometimes called an “H4P,” is a product that allows a borrower that’s at least 62 years of age to take out a reverse mortgage in order to fund the purchase of a new home, without the need to make a monthly mortgage payment.
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