This week, Gail explains what you should expect on your credit report after seeking credit counseling and helps a reader figure the capital gains tax liability on Mom's house.
With respect to your comments on using Consumer Credit Counseling Service or some other agency that works with your creditors, it is my understanding from a bank loan officer that if CCC alters the normal interest rates due on an account, it will have an adverse effect on your credit rating.
Can you verify the ramifications of using CCC? Nothing usually comes for free.
For the sake of those who might have missed my article titled "Digging Out of Debt," (dated July 14, 2001 and accessible via the "Archives"), there are credit counseling agencies in virtually every city in America, large and small.
These agencies offer to intercede with creditors and arrange a more realistic repayment schedule for those who find themselves unable to keep up with their debts.
Sometimes this involves negotiating a lower interest rate on your outstanding balances. It might also involve reducing the required monthly payments, which has the effect of stretching out the length of time you have to repay the debt.
According to Joy Thormodsgard, a vice president with the National Foundation for Credit Counseling, simply lowering the interest rate on your debt has no impact on your credit rating. In fact, this doesn't show up on your credit report.
However, Thormodsgard says, "While you are in a debt management program, many creditors will put a note in your credit file that says you are in financial counseling." Each creditor interprets this differently. Some might see it as a negative, while others consider it a positive, that is, you're making an effort to repay as opposed to walking away from your debt.
The point is, don't assume every lender will interpret this the same way your bank does. After you work off your debt, a creditor must report you have a zero balance.
Beware! There are lots of copycat counseling services which are actually for-profit operations. The key question to ask is, "Are you accredited by the National Foundation for Credit Counseling?," which has been around for almost 40 years. You can get a list via their Web site, www.nfcc.org, or by calling their toll-free number: 800-682-9832.
Which would you rather have in your credit report, a note indicating you're making a good faith effort to repay your debts, or a note saying you haven't made a payment in 120 days? For many people, the agencies affiliated with NFCC have been an enormous help and have enabled them to avoid the biggest black mark of all: "bankrupt".
Take care —
P.S. If you'd like to check out your credit rating, visit the Web sites of two of the largest credit reporting firms: www.experian.com and equifax.com. You can also read about their reporting policies.
What would be the capital gains tax liability if my brother sold for $80,000 the house he inherited from my mother?
As with any other inherited asset, when you sell an inherited house, you are liable for capital gains taxes. The profit or "gain" is simply the market value of the house when your mom died subtracted from your brother's net profit when he sells it.
To figure out his net profit, your brother would start with the gross sales price minus any costs associated with the sale. These would include real estate brokerage commissions, fees, expenses he incurred to get the house in salable condition (painting, for example), etc.
From this number, he then subtracts what the house was valued at on the date of your mom's death. As an alternative, the law allows him to choose the date six months after her death.
Why would he want to do this? Suppose real estate prices took off shortly after your mom passed away. In that case, choosing the later valuation date would give him a higher value for the house and, thus, a smaller profit on its sale, resulting in lower capital gains taxes.
For instance, suppose your brother spent $2,300 to repair the roof of your mom's home when he put it on the market and then paid a 6% real estate commission of $4,800. Subtracting these expenses from the sales price gives him a "net" sales price of $72,900 ($80,000 - $7,100).
And let's say the house was valued at $66,000 on or about the date of your mom's death. Your brother's taxable gain would be $72,900 minus $66,000 = $6,900.
Notice the tremendous tax break Uncle Sam is giving us here by allowing us to use the current value of the inherited asset as opposed to what the deceased owner actually paid for it. Imagine the capital gain your brother would have if he had to use the price your parents originally paid for the house!
In fact, this "step up" to current value will disappear when the estate tax is finally repealed in 2010. At that point, the gain on inherited assets will be based on their original price. But this is the trade-off for not subjecting a decedent's assets to estate tax. In addition, there will be a break for children who inherit a parent's home: they would get to exclude up to $250,000 worth of the gain from tax.
Hope this helps,
If you have a question for Gail Buckner and the Your $ Matters column, send them to firstname.lastname@example.org along with your name and phone number.
The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.