Inheritance tax and Interest Only Mortgage
Inheritance Tax and Real Estate:
I was lucky enough to be in the UK a week ago, and saw a headline that caught me by surprise. A “New” mortgage product was coming to England. Interest only. “Why?” you should be asking? Because home ownership has more than doubled over there since 1950. When the owner dies, and passes the home on to relatives, inheritance tax is paid on everything over $500,000 at about a 40% rate. If they pay interest only, the Mortgage passes on, but without value paid in the home, no inheritance tax.
Interesting concept, but it won’t affect us here will it? Let’s study the past, check the present, and look to the future.
Not a new concept in the US, but one abandoned long ago. In the 1920’s this mortgage was very popular. Worked well here in the US. You make interest only payments for a fixed period, and then refinance your home. In fact, they work very well unless your house looses value, or you loose your job. Then along came the Great Depression. Job? Value? Foreclosure? You get the picture. Banks got stuck holding property they had too much money in, and couldn’t sell. So they stopped offering the program.
While this program is starting to be offered in the US, it’s sweeping Europe because of the inheritance tax. You can by a home, make payments, deduct the interest, and pass the debt on to your heirs. If the property value goes up over a number of years, then they can sell it. In the US we’re allowed to take a primary residence deduction. So, wait a little time, make payments, and sell for big profit. Move on.
Year Exclusion Amount Max tax rate
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Repealed 0%
2011 $1 million 55%
In the US, we’re better off right now. Kansas has no inheritance tax (http://www.ksrevenue.org/perstaxtypesestate.htm). And the US Government has been raising our threshold over the last few years.
Looking at the table, you might think we’re doing OK, and not worry. After all, our rates are moving down. And our Real Estate isn’t as costly as Europe’s. But look at 2011. Without congressional movement, we’ll be back at the 55% level in 5 years. By the way, those figures are the value of the WHOLE inheritance, not just the home. The Government may need to make income up for what they’re spending now. And thinking about home prices, they don’t seem to be going down much (really?), and prices are lots higher on both coasts. I’m not going to pretend to explain or understand other tax plans (gifts, living trusts, etc.) and how they will work with tax savings.
So, taking in account the present and the future, looking at Europe, it may not be to far off when someone will start touting this in the US (good old internet advertising…). We know 40 year mortgages are here, we know that with a little work, we could find an interest only plan, and we know with home prices rising that estates will be going up sharply. Our job isn’t to tell our clients how to finance, but to understand the basics of what’s going on, and advise them to seek SOUND advice from a reliable Mortgage provider. Get advice from an accountant or attorney if the amounts are large enough.
Finally, given the quickly changing Mortgage industry with multiple programs and qualifications, I think all of us would be foolish to try and give our clients much more than the basic overview of financing a home, and get them to a Mortgage pro quickly. We may be able to keep up with some of the programs, but just like a Mortgage pro can know about some of the homes on the market but not all, there is NO WAY we can keep current with all the programs. Let the pro’s give the most up to date info to our clients.