DEAR BOB: My husband and I are both 62. We wish to sell our primary residence now and then sell our beach house after living in it for two years. Are we eligible for the home-sale tax exemption on both sales to avoid the capital gains tax? –Genevieve M.
DEAR GENEVIEVE: Your ages are irrelevant for use of the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a married couple filing a joint tax return). To qualify, you must own and occupy your primary home at least 24 of the 60 months before its sale. But this tax break can only be used once every 24 months.
Purchase Bob Bruss reports online.
That means you can use IRC 121 to now sell your principal residence (presuming you meet the ownership and occupancy tests) and avoid tax on up to $500,000 of capital gains.
Next, you can convert your beach house into your principal residence for at least 24 months and then sell it for another tax-free capital gain up to $500,000. However, if the beach house was a rental and you deducted depreciation on it, the depreciation portion of your capital gain will be “recaptured” and taxed at a special 25 percent federal tax rate. For full details, please consult your tax adviser.
NO STEPPED-UP BASIS FOR GIFT HOUSE
DEAR BOB: When my husband and I were married in 1997, his parents gave us a wedding gift of their former residence where they lived for about 25 years. They bought a condo in Fort Lauderdale, Fla., where they have lived happily ever since. However, they both died in 2005 of illness. We now need to sell our home due to a job transfer. Do we qualify for the “stepped up basis” you often discuss? –Sarah R.
DEAR SARAH: No. When you and your husband received that wonderful wedding gift in 1997, as the donees you took over the donors’ presumably very low adjusted-cost basis in the house, where you lived since then.
You did not receive a stepped-up basis to market value because you received a gift deed in 1997 and did not inherit that house. The only way to receive a new stepped-up basis to current market value is to inherit property from a deceased owner.
However, you and your husband presumably qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $500,000 (up to $250,000 for a single home seller) so that should help with your capital gain tax problem. Your tax adviser can provide full details.
TO OBTAIN REVERSE MORTGAGE, CAN TITLE REMAIN IN A LIVING TRUST?
DEAR BOB: Thank you for sharing the benefits of senior citizen reverse mortgages. I have been considering one for several years so I can afford to stay in my house. In January, I closed on a reverse mortgage that provides me with money for a new roof and lifetime income even if I live to be 120 (my family tends to live into their 90s). But at the closing settlement, I had to sign papers taking the title of my house out of my living trust. I was not happy about that, but I was rudely told, “Take it or leave it.” So I took it. Does this mean when I die, my house will have to go through probate court? –Alan H.
DEAR ALAN: Yes. But you can easily change that. The reverse mortgage lender wanted you to sign the loan papers as the owner of the house. While you held title as trustee of your living trust, you couldn’t do that. So the lender insisted you deed the title, as trustee, back to yourself so you could sign the reverse mortgage papers.
However, whoever handled the reverse mortgage paperwork should have suggested you sign a quitclaim deed from yourself back to yourself as trustee of your living trust. That’s a very easy transaction.
Just go back to whoever handled the reverse mortgage paperwork and ask to quitclaim the title back into your living trust. The cost should be minimal. Your living trust heirs will thank you for avoiding probate costs and delays.
SPECIAL TAX BREAK FOR HURRICANE VICTIMS
DEAR BOB: I read with special interest your recent article about the casualty loss tax deduction. I realize the casualty loss deduction applies to lots of uninsured losses, such as fires, landslides, water damage, rain, and other causes. But my daughter’s home was almost completely destroyed in Hurricane Katrina. It looks like insurance will only pay a small part of her loss. I thought I read elsewhere about a special tax break for hurricane victims. Do you have any information? –Victor Y.
DEAR VICTOR: After I wrote that article about “sudden, unexpected, or unusual” casualty losses, Congress passed legislation and the IRS published a wonderful new Publication 4492 about the special casualty loss tax breaks for Hurricane Katrina, Rita, and Wilma victims.
A major benefit is the 10 percent of annual gross income minimum and the $100 per event floor are waived for such hurricane victims. There are also special benefits for business owners. To obtain a copy of Publication 4492, call 1-800-829-3676 or on the Internet go to www.irs.gov/pub/irs-pdf/p4492.pdf.
UNEXPECTED TAX DOESN’T CANCEL HOME SALE
DEAR BOB: You helped me once before, and hope you can help me again. I am a first-time home buyer. I found a “screamin’ deal” on a brand-new house. The seller, who is also a Realtor, agreed on the price. We both signed the sales contract. She wanted to close as soon as possible. With less than two weeks until closing, she phoned me to say, “I just found out I have to pay $13,000 in taxes so I’m sorry I can’t sell you the house at the price we agreed. But I will try to find you another house.” We have a standard sales contract, signed by both buyer and seller. What are my rights? –Tom C.
DEAR TOM: Just because the home seller learned she will owe an unexpected $13,000 tax on the sale doesn’t cancel the transaction. Presuming you have a valid purchase contract with no loopholes for the seller, you have every right to enforce your purchase contract.
Run, don’t walk, to the office of the best real estate attorney in town. He or she will probably recommend immediately filing a specific performance lawsuit to force the sale of the house on the terms agreed. Also, your attorney will probably suggest recording a “lis pendens” (which means litigation is pending) against the title to effectively prevent your seller from selling or refinancing the house.
SHOULD PARENTS DEED HOME TO CHILDREN AND PAY NO RENT?
DEAR BOB: What is your opinion on a parent deeding a home to his children and paying no rent until death? They will pay the property taxes and mortgage payments –Maurice I.
DEAR MAURICE: I don’t like that idea at all. There aren’t any real advantages for the parent, but lots of disadvantages for everyone.
I presume you are referring to adult children at least age 18. A major disadvantage for the children is, as gift donees, they take over the parents’ usually low-adjusted cost basis. They forfeited the “stepped-up basis” market value they would receive if they instead inherit the property.
Deeding title to adult children means the parent gives up control over their home. Unfortunately, like fine wine, some children go bad for no explainable reason. Over the years, we have had many sad stores in this column about such problems.
If your adult children want to pay your property taxes and mortgage payments, to claim the itemized income tax deduction they can be added to your home’s title. For full details, please consult your tax adviser.
NO TIME EXTENSION FOR TAX-DEFERRED EXCHANGE
DEAR BOB: How do the extensions for an Internal Revenue Code 1031 tax-deferred exchange work? –Marilynn E.
DEAR MARILYNN: Sorry, there are no provisions in Internal Revenue Code 1031(a)(3) for any Starker exchange time extensions. After you sell your old investment or business property, you have only 45 days to designate up to three replacement properties to be acquired.
You have up to 180 days to complete the replacement property acquisition. If you miss these tax-deferred exchange deadlines, your capital gain on the sale of the old property becomes taxable. Your tax adviser can provide more details.
The new Robert Bruss special report, “2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Real Estate Investors,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery 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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