Benny L. Kass Mailbag

Selling means you must pay off your home-equity loan Q:I used the equity in my primary residence to take out a home-equity line of credit. Two years ago, I used the loan to buy a condo as a second home. I am about to sell my primary residence and make a nearly $150,000 profit. I do not want to pay off the loan right now, as the condo is worth just $50,000, and I paid $150,000 for it.

Must I pay off the loan when I sell my primary house? I am a nervous wreck thinking that all the profit I just made is going to have to go to pay off that condo, which is worth less than half of what I paid for it. Since the loan is a 10-year line of credit, can I continue to pay monthly on this? -- Stacey

Answer: Sorry, but you will have to pay off the loan when you sell your primary residence.

The lender made this money available to you based solely on the equity in your house. If you were to default by not making payments, the lender would be able to foreclose on the property.

But once the loan is released from land records, that lender has no more security. If the condo unit had any equity, you might be able to get a new loan using the condo as collateral. But unfortunately, it does not.

If your credit is good and you have other assets, a lender might be willing to give you an unsecured line of credit, but that's very difficult to get in today's economy.

Q:A few years ago, my son bought a small, but cute, home. My husband and I were empty-nesters with a large home. Recently, my husband died, my son got married and his wife is expecting. I would like to trade homes with my son. Is there any way of doing this without too much money involved?

I do not have any mortgage on my home, but my son does. If he could just continue to pay his current mortgage and his new taxes, etc., I would pay the bills on the smaller home. Is this possible to do without the nightmare of taxes, closing fees, etc? -- Andrea

Answer: That's a very interesting suggestion. There are a number of ways to accomplish your objectives. First, you and your son (and his wife) could just move in to each other's house. You each could pay a nominal rent to each other, or you could just stay without paying any rent -- although your son would have to continue paying the mortgage, the insurance and the real estate tax.

Under this approach, there would be no closing costs and no income tax to pay. But if your husband just died and you sell the house within two years from the date of his death, (and you did not remarry) you are eligible to exclude up to $500,000 of any profit that you will make on the sale. At the end of the two years, you can deduct only up to $250,000 of gain, so long as you have lived in the house two out of the five years before it is sold. Depending on how long you wait to sell, you may lose all of these tax benefits.

My suggestion is to sell your house to your son now and take back all of the financing. Get a lawyer to draft up the promissory note and deed of trust (also called a mortgage), and record the trust document among the land records where the property is located. Your son can sell his house to you, and he will sign the same documents for the difference between the sales price and the mortgage. Because this will be a transfer between mother and son, the lender will not be able to object to this transaction.

Benny L. Kass is a practicing attorney in Washington. Questions for this column can be submitted to .