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Archive for Friday, October 2, 2009

Lawmakers mull cuts to realty deductions

October 2, 2009

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Q: Is it true that Congress is thinking about reducing or even eliminating the tax deductions for mortgage-interest payments?

A: Though no formal bills have been introduced, a small but growing number of lawmakers are considering cutbacks in mortgage-interest deductions and other real estate write-offs to help curb the ballooning federal budget deficit and to pay for the Obama administration’s variety of new programs.

Such discussions began just a few weeks ago, when the Congressional Budget Office released a report detailing ways to raise billions of dollars in new revenue for the federal Treasury. The report will help the House and the Senate as they begin crafting this fall’s budget and tax proposals.

One option is to gradually reduce the amount of borrowing that qualifies for mortgage write-offs. Currently, taxpayers can deduct interest on up to $1.1 million in home-loan debt. By reducing that to $500,000, budget analysts say, the Treasury would reap an additional $41 billion over a 10-year period.

As an alternative, the office suggests scrapping the mortgage-interest deduction completely and replacing it with a flat 15 percent tax credit for interest by borrowers whose loans fall below the gradually declining limits included in the previous option. The move would raise about $13 billion in 2013, when the new $500,000 loan limit would take effect, and a staggering $390 billion through 2019.

The current deductions for property-tax payments are also at risk: The CBO says that eliminating write-offs for property taxes and other types of state and local levies would pump more than $1 trillion into Uncle Sam’s coffers over the next 10 years.

Of course, no one can predict what Congress’s final tax and budget proposals will include when they come up for a vote in the months ahead. But it’s clear that even the once-sacrosanct realty deductions could be in jeopardy.

We are in the process of buying a home and recently received some pre-closing papers. One of the documents lists the seller’s remaining mortgage balance, as well as an outstanding “chattel mortgage” of $22,300. We have never heard of such a mortgage. What is it?

A chattel mortgage is a loan that’s backed by personal possessions, such as a boat or car, rather than a home or other real estate.

I’m not really sure why the existence of the seller’s chattel mortgage was included in the paperwork that was sent to you. Perhaps the sellers took the loan out a few years ago by pledging some of his or her personal assets, with the understanding that the money would have to be paid back in a lump sum if their home was sold before they could pay the chattel mortgage off through their regular monthly installments.

You need to talk to the closing attorney or escrow agent overseeing the transaction for an explanation. You also should demand written assurance that the seller’s chattel mortgage won’t affect title to the home — or require you to start making the payments — after you move in.

Q: I recently inherited my father’s house, and I want to rent it to tenants. When I called the company that insures my own home, I was told that it does not insure rental properties. I have since found a couple of firms that will insure the rental, but the coverage would cost several hundred dollars more than my own home’s policy even though the two properties are in the same neighborhood and are about the same size. Why?

A: Some insurers refuse to cover rentals because they believe tenants won’t take good care of the home or that it might become vacant and attract vandals, either of which could increase the chances of having to pay out a claim. Others will issue policies on rentals, but often charge extra to compensate for the perceived higher risk.

Call at least two or three more companies and insurance brokers to see whether you can get a better deal. Also ask each one to provide a quote for homeowners, automobile and life insurance: Many firms offer deep discounts to customers who take out multiple policies.

As an alternative, you might arrange a “blanket policy” to cover your house and the rental. Such policies can be the cheapest way to insure more than one home because an insurer spreads the risk over multiple properties.

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