DEAR BOB: My husband and I own a three-unit apartment building. We live in one of the apartments. We’re planning to sell and buy a single-family house as our residence. What are the tax implications if we buy a house for more than what we sell the building for or if the new house costs less than the current building? –Jane D.
DEAR JANE: The purchase price of your personal residence house is irrelevant. You don’t need to buy another replacement principal residence to avoid capital gains tax.
Purchase Bob Bruss reports online.
You can use the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) for the profit from the sale of your personal residence apartment.
To determine this amount, before the building sale closes, you should obtain a professional appraisal to allocate the sales price between the two rental apartments and your personal residence unit.
But the only way to avoid capital gain tax on the sale of the two rental apartments is to make an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater cost and mortgage debt.
Thanks to Internal Revenue Procedure 2005-14 you can use both IRC 121 and IRC 1031 for the same sale, such as your residence-rental building. For details, please consult your tax adviser.
NO STEPPED-UP BASIS UNLESS THE PROPERTY IS INHERITED
DEAR BOB: My grandmother is 80. I have been paying her home utilities, insurance, and property taxes. But I have not been able to deduct these expenses because I am not on the title to her home. She wants to sign the house over to my wife and me. What is the easiest way for her to gift the house to us? Must a title company be involved? Will the stepped-up basis to market value apply in this situation? –Tim F.
DEAR TIM: The easy way to transfer property title is a quitclaim deed. Yes, you should buy an owner’s title insurance policy to be certain you receive marketable title.
But the bad news is, as a gift donee, you must take over your grandmother’s presumably very low adjusted-cost basis.
The only way to obtain a stepped-up basis to market value is to inherit property. That means somebody has to die first.
A better approach might be for your grandmother to deed you a joint tenancy interest in the property so you can deduct the property taxes you pay for her. Please consult your tax adviser for full details.
HOW CAN HUSBAND GET WIFE TO ADD HIM TO HOME TITLE?
DEAR BOB: When we purchased our house, I signed a quitclaim deed relinquishing my interest in the house to my wife. Now I want my name and co-ownership of the house back on the title. What should I–or my wife–do to accomplish this? –Joseph N.
DEAR JOSEPH: Presuming you have been behaving well and are in good standing with your wife, she can sign a quitclaim deed giving you a 50 percent interest in the house.
However, that deed should state how you wish to hold title together. I recommend holding title in a revocable living trust to 1) avoid probate costs and delays when one of you dies, and 2) provide management if one of you becomes incapacitated. Please consult a local real estate attorney for details on the best way to hold joint title.
More details are in my special report, “24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
