Reader Question: My home is paid for except for a $40,000 home equity line of credit. We are considering taking out a mortgage on our home to take advantage of the 2.5% interest rates and using the proceeds to buy a beach condo. Is this something you would recommend for an investment? T.G.
Answer: Beach property, which took a big hit in the Great Recession of 2008, is beginning to make a comeback so now may be a good time to buy. It’s also a great time to get a permanent mortgage since interest rates are near historical lows. Care must be taken if you want to make certain that your interest payments are deductible. Normally that requires that the acquisition property (the beach home in this case) serve as security for the loan. Your best bet is to consult with your tax advisor.
For vacation property, my general rule of thumb is that you should rent rather than buy unless you’re able to use the property for more than three months per year. This assumes, as an owner, you do not plan to rent out the property. If you do plan to rent the property, you may find the advantages of frameless glass office partitions to the renters want to rent the same weeks you want to go! It is also my experience that Guelph Electrician net rental income rarely covers the ongoing property expenses so don’t count on this being a profit-making venture. Also, you need to be confident that you’ll have a consistent source of funds to pay your mortgage for the next fifteen years. A lot of people found out they didn’t have the income to pay their mortgages during this last crisis and ended up losing their home to foreclosure. I strongly suspect that we’ll see additional crises of similar magnitude over the next fifteen years. One final word of caution: You have an equity line of credit and other readers might consider using an equity line of credit to buy property or other assets. These types of loans work great in a low interest rate environment but can be a huge burden if interest rates rise rapidly since most of these loans allow the interest rate to change based on the bank’s prime interest rate. I anticipate that rates could rise significantly within the next five to seven years.
Reader Question: I recently became the trustee of a family trust where ninety percent of the assets are invested in tax free municipal bonds. I would like to diversify the assets but I am concerned about the tax implications and risks. Also, since the assets were invested over a 30 year period, I do not have any cost basis information should I decide to sell the bond funds. Any suggestions? J.K.
Answer: Typically a family trust comes into being because someone, a parent in this case, dies and through his or her will directs all or a portion of his or her assets go to a trust that is set up to benefit the surviving spouse (if there is one) and/or the children. This type of trust can be set up for a variety of reasons including:
- Avoiding estate taxes
- Providing professional management
- Protection against lawsuits and other liabilities
As far as determining the cost basis of the securities, that may be the easiest question to answer. For income tax purposes, the securities receive a step-up in cost basis as of the date of death of the owner so there is no need to figure out what your parents paid for the securities over years past. An accountant or securities broker should be able to help you determine the market value as of the date of death of your parent. Diversification of the assets may be a trickier question. Lately there has been increasing concern over the safety of municipal bonds due to deteriorating financial strength of municipalities across America. Ideally, you should have a professional who is experienced in bond analysis review the portfolio and make recommendations about what to sell and what to hold. You’ll then need to decide where to invest the proceeds…whether it’s stocks, bonds, CDs, money markets or mutual funds of stocks and bonds. Again, I recommend you seek professional guidance as the answer to this question will depend on the facts and circumstances of the beneficiaries of the trust.