Can part of a vacation home be mortgaged?
Q:
I own a mortgage-free vacation home with two other sisters. One sister wants to buy out the other sister. Can she use the house as collateral to secure a mortgage to buy out the second without my approval? All three of us are listed as owners on the deed.
A:
Yes, assuming there are no legal restrictions or documents to the contrary, each of you can give an interest in your share of the home without getting the approval of the others.
The real question here is: “Where can I find a lender willing to take a one-third interest in a property?”
The answer is: “Good luck trying to find one.”
The truth is, a one-third interest in an asset is pretty lousy collateral. It’s not really worth that much to a mortgage holder. Consider the situation from the lender’s point of view: If the sister defaults on the loan, what is the lender going to do with a one-third interest in the property? Move in with the other two sisters? Sell it? To whom?
Who would purchase a one-third interest in a home under those circumstances? Yes, your sister can use her portion of the vacation home as collateral for a mortgage, but don’t count on her finding a lender. Then again, after some of the home loans that lenders were making the last few years, anything is possible.
Source: Richard Brooks, a partner at Marcus, Errico, Emmer & Brooks in Braintree.
Q:
I know that married couples get a $500,000 exemption against capital gains taxes on the sale of a principal residence. What happens if one of them dies? Can the surviving spouse still get the same $500,000 exemption?
A:
A surviving spouse has two years from the date the other one died to sell the home and be able to claim the full $500,000 exemption.
Of course, the surviving spouse has to meet the ownership and use test – i.e., the couple must have lived in the home as their principal residence for two out of the past five years before one of them died. The surviving spouse cannot have remarried within the two-year period.
