DEAR BOB: We have been in our 350-square-foot apartment for 18 months. Recently we learned I am unexpectedly pregnant. Our apartment is up four flights of stairs (about 50 steps). Can we qualify for an exclusion from paying capital gains on the sale of our apartment? I have to walk up and down at least six times a day to walk my dogs and get to work –Gabrielle B.
DEAR GABRIELLE: I presume you own a fourth-floor walk-up condominium or cooperative apartment. Perhaps you can get a letter from your doctor advising you to move immediately for health reasons.
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Usually, pregnancy is not a valid reason for a partial use of the Internal Revenue Code 121, but your situation might be an exception.
If you and your husband owned and occupied the condo or co-op for 18 of the 24 months required, and if your move is due to valid “health reasons,” then you can qualify for up to 75 percent of the $250,000 principal residence sale exemption (up to $500,000 for a qualified married couple filing a joint tax return). For full details, please consult your tax adviser.
IT’S NEVER TOO LATE TO START DEDUCTING DEPRECIATION
DEAR BOB: In a recent item, you said that when a rental property is sold, there is a special 25 percent federal “recapture tax” on depreciation that has been deducted. It then occurred to me that my wife and I should have been deducting depreciation on the condo we have been renting to tenants for the last 20 years. Can we amend our tax returns to claim the depreciation we “forgot” to deduct? I never knew before reading that item that we were required by the IRS to deduct depreciation on a rental property –Pio M.
DEAR PIO: It’s never too late to start deducting the depreciation you should have been claiming on Schedule E of your federal income tax returns. You can amend your income tax returns for the last three years to claim a refund.
Of course, if you and your wife never sell that rental condo and both die while still owning it, Uncle Sam can never claim the 25 percent federal depreciation recapture tax from you.
I strongly suggest you consult a local tax adviser who is familiar with real estate taxes to discuss your unusual situation. There is no penalty for not claiming the depreciation deduction so I see no harm in starting to claim it now.
The depreciable basis for your condominium is its purchase price, plus any capital improvements added during ownership, minus your share of the common area land value (usually a very small percentage for most condominiums).
IS P.M.I. PREMIUM TAX DEDUCTIBLE?
DEAR BOB: We are considering buying a new house for zero down payment. But we will have a monthly PMI (private mortgage insurance) payment of $86 per month. The salesman wasn’t sure if the PMI premium is tax deductible? –Jeanette S.
DEAR JEANETTE: There’s a good reason the salesman “forgot” the answer (if he knew it). Currently, PMI premiums are not tax deductible.
There are several proposals in Congress to make PMI tax deductible like interest. But the chances of passage soon don’t look good.
A better alternative would be to obtain an 80 percent first mortgage and a 20 percent second mortgage, often called a home equity loan. Then you won’t have any PMI premium and all the interest you pay will be tax deductible. For more details, please consult your tax adviser.
The new Robert Bruss special report, “Pros and Cons of Today’s Five Best Real Estate Profit Opportunities,” 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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