DEAR BOB: I read with great interest your recent item about stepped-up basis for inherited property. My parents bought their home near Chicago in 1969. Dad died in 1981. My mom put me on the title with her in 1996. The purpose was to avoid probate when she passed on. She died in 2003. I sold the house in 2004. I keep asking my CPA about my tax situation, but he has never given me a solid answer. I am getting worried and frustrated. He said it depends on whether an IRS Form 1099 was filed on my mom’s house sale and if it was sold for the estate of my mom. Please clarify – Pat K.
DEAR PAT: As I often say, it’s better to inherit real estate than to receive it as a gift shortly before death. Your situation is a classic example. If your mother had given you her home as a gift before she died, your basis would be her presumably very low adjusted cost basis.
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Instead, Internal Revenue Code 1014 says when a person inherits property they receive it with a new “stepped-up basis” of market value on the date of death (or alternate valuation date used by the estate). Unless the sales proceeds of the house went to your mother’s estate, perhaps to pay debts and taxes, the sale proceeds belong to you.
Your capital gain should be only the difference between your stepped-up basis of market value on the date of death and your net or adjusted sales price. If you sold the house shortly after your mother’s passing, there probably was little or no capital gain.
The title company or attorney who handled the sale closing in 2004 should provide you with an IRS Form 1099 showing the gross sales price. If you didn’t receive it, ask for a copy because you will need the information for your 2004 income tax returns. From the sales price on the 1099, don’t forget to subtract selling costs, such as transfer fees and sales commission. For more details, please consult a tax adviser.
CONDO BUYER IS SHOCKED BY OWNER’S TITLE POLICY EXCLUSIONS
DEAR BOB: We recently purchased a condo in fee simple for $212,620. When I received the “ALTA” homeowner’s title insurance policy, I was shocked to discover the coverage exclusions, such as for violation of subdivision law, if we are forced to remove or remedy any structure that violates the law, and if we must remove an encroachment on a neighbor’s land. It doesn’t look like I am receiving clear title. Nobody explained these exclusions at settlement – William S.
DEAR WILLIAM: An ALTA owner’s title insurance policy is the standard policy of the American Land Title Association. Most title insurers issue this owner’s title policy or a similar policy.
Congratulations on buying an owner’s title policy. Some home buyers don’t purchase such coverage, to their later regret when a title defect arises.
The exclusions you question are in the printed “boilerplate” of the policy. They don’t appear to directly affect your condo title because there weren’t any title exceptions listed on your policy.
If your policy had excluded coverage for an encroachment, for example, then you should be concerned. It appears you have a normal owner’s title policy with a bunch of legalese, which shouldn’t cause concern. For full details, please consult a local attorney who specializes in title insurance.
$500,000 HOME-SALE TAX BREAK WHEN TITLE IS IN ONE SPOUSE’S NAME
DEAR BOB: I read your recent answer about the principal residence sale deduction of $500,000 and need clarification. Are you saying even though I am married and I am listed on my home’s title as a married man as his sole and separate property, if I were to sell the house I would only get the $250,000 exemption because my wife isn’t on the title even though I am legally married? – John T.
DEAR JOHN: No, I didn’t say that.
To qualify for the $500,000 principal residence sale exemption of Internal Revenue Code 121, both you and your wife must (1) occupy your principal residence at least 24 of the 60 months before its sale, and (2) file a joint income tax return in the year of the home sale.
If you meet the occupancy time test, but your wife doesn’t, then you get only a $250,000 exemption. However, if she meets the occupancy time test, but you don’t, no exemption is allowed because you are the titleholder who must qualify.
The home’s title need only be held in one spouse’s name to qualify for up to $500,000 principal residence sale tax-free profits if both spouses meet the occupancy time test. More details are in my new special report, “Everything Homeowners Need to Know About the New $250,000 and $500,000 Home Sale Tax Exemption Rules,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant PDF Internet download at www.bobbruss.com.
ANY RECOURSE FOR A WORTHLESS QUIT CLAIM DEED?
DEAR BOB: About seven years ago, my uncle gave me a quit claim deed to some farm land he owned. It was properly notarized and witnessed. He told me not to record it until after he died. In August 2004 he passed on. Shortly after the funeral, I recorded the quit claim deed. When I went to inspect the property, I discovered a fairly new house had been built on it within the last few years. When I inquired of the owner who was mowing his lawn, he said he bought the land from my late uncle in 2001 and built the house in 2002. When I told him about my quit claim deed to the property, he suggested I consult a real estate attorney, which I did. It cost me about $650 to learn the homeowner has valid title to the land and my quit claim deed is worthless. Is this true? – Roger R.
DEAR ROGER: Your situation shows the danger of not promptly recording a deed. I won’t say your late uncle was dishonest, but when he sold to a bona fide purchaser (BFP) the same land he had earlier given to you, that made your earlier quit claim gift deed worthless.
There’s another reason your deed is not valid in most states. It was delivered to you on the condition you not record it until after your uncle’s death. A conditional deed delivery is not complete and is therefore invalid. Your real estate attorney appears to have given you sound advice (although it wasn’t what you wanted to hear).
NO DOWN PAYMENT PLAN WORKS
DEAR BOB: You inspired me some time ago when you wrote about buying a horrible fix-up house in the middle of a nice neighborhood for nothing down. Although the house I recently bought didn’t have the “open air skylights” you described with rain and tree leaves coming into the house, the house I bought was in bad shape as it had been vacant about a year. I drove by that empty house almost every day as it is only three blocks from my job. The neighbors didn’t know what happened to the owner. One day I stopped by a title insurance office to seek help finding the owner. It took about a week, but they told me it appears the house was inherited by an out-of-state owner. I finally located her. She lives in Florida, is quite wealthy, and didn’t want the house. When I offered her nothing down with a 30-year mortgage at 4 percent, she accepted and said she would donate my monthly payments to her favorite charity, Habitat for Humanity. The house is all fixed up now. My wife and I recently moved in. Thanks for your encouragement – Carlos H.
DEAR CARLOS: Congratulations to you and the title company for your detective work locating the owner and negotiating a nothing down home purchase.
For readers not familiar with my “worst house I ever bought” story, the short version is it was a run-down house in a great neighborhood. The roof was so rotted, you could look up from the living room and front bedroom at the blue sky.
My bank loaned me the money to buy the house, based on its fixed-up value. I used my bank credit line for the down payment, thus making a nothing down purchase. The bank even featured that house in their newsletter to show “community reinvestment.” After fixing it up, several years later I sold that house at a nice profit.
The new Robert Bruss special report, “How the New Tax-Deferred Realty Exchange Rules Can Make You Very Wealthy,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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