DEAR BOB: My wife and I bought our first home in March 2004. We sold it in January 2005 due to the birth of our wonderful twins. When we sold it, we used our profit to buy a larger home with double the square footage and almost double the price. Can we apply for an exception on the sale of our home pertaining to Internal Revenue Code 121 due to the multiple births although we don’t meet the 24-out-of-60-month occupancy test? –Kyle G.
DEAR KYLE: Congratulations to you and your wife on the birth of twins. Uncle Sam is so thrilled he will reward you with a partial IRC 121 principal residence sale tax exemption based on the number of months of ownership and occupancy.
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The Internal Revenue Service calls your situation an officially approved “unforeseen circumstance,” entitling you to a partial $500,000 home-sale tax exemption.
Because you occupied your principal residence for 10 months, you qualify for an exemption of 10/24ths of the $500,000 exemption available to a married couple filing a joint tax return. That should be enough to shelter all your capital gains from taxation.
The fact you used the sale proceeds to buy a larger home, however, is irrelevant. All that matters is you had an “unforeseen circumstance” entitling you to a partial IRC 121 tax exemption. For more details, please consult your tax adviser.
CAN LANDLORD DEDUCT PRIVATE MORTGAGE INSURANCE?
DEAR BOB: I am paying private mortgage insurance (PMI) premiums on my rental income property. I was told I can deduct my PMI premiums on my tax returns. If this is true, where should I put this deduction on my tax returns? –Claude R.
DEAR CLAUDE: You are correct. The PMI fee is an “ordinary and necessary” operating expense for your rental property. However, PMI is not tax deductible for personal residence owners.
There is no right or wrong place to list on your Schedule E the PMI fees you paid. The blank space for other expenses seems the ideal place to claim this significant tax deduction. For more details, please consult your tax adviser.
The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” 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 delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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