DEAR BOB: I am selling a condo that is in my daughter’s name. I have lived in the condo for the last seven years and paid the mortgage payments. The sale will close the first of next month. It will show up as a $120,000 capital gain for my daughter. Can she use the sales proceeds to pay for another house for me to live in and claim it as a gift? –Sandra R.
DEAR SANDRA: Because the condo was not your daughter’s principal residence at least 24 of the 60 months before its sale, she is not qualified for the Internal Revenue Code 121 tax exemption up to $250,000.
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Since your name is not on the title to the condo, although you paid the mortgage payments, you are also not eligible for the $250,000 tax exemption. Therefore, when the condo sale closes, your daughter becomes liable for the capital gain tax on her $120,000 condo sale profit.
It is a shame you and your daughter didn’t consult your tax advisers. If you had done so 24 months ago, and if your name was on the condo title, then you could have deducted the mortgage interest paid and you would qualify for the IRC 121 principal-residence sale-tax exemption up to $250,000.
Your daughter can give you up to $12,000 in 2006 without filing a federal gift tax return. Above that amount, she must file a gift tax return. However, if her lifetime non-exempt gifts have been less than $1 million, she will not owe any gift tax if she gives you $120,000 to buy another home. For full details, please consult your tax adviser.
DATE-OF-DEATH MARKET VALUE DETERMINES STEPPED-UP BASIS
DEAR BOB: My three sisters and I sold a house inherited from our mother. Do we owe capital gains tax on the sale proceeds? The house was sold for about $150,000 more than she paid for it some years ago –Lucy S.
DEAR LUCY: All that matters are (1) what was the “stepped-up basis” market value of the house on the date of your mother’s death, and (2) what was the net amount received from the house sale?
If the net amount received, after paying sales expenses, exceeds the market value on the date of death, the difference is your taxable capital gain. In most situations where an inherited property is sold shortly after receiving title with a stepped-up basis, the capital gain tax will be very small. For details, please consult your tax adviser.
OWNER’S TITLE INSURANCE PAYS UP TO POLICY PURCHASE PRICE LIMIT
DEAR BOB: Let’s assume I purchased my home 10 years ago for $150,000 and obtained an owner’s title insurance policy at that time. Suppose I sell it now for its current $400,000 market value but I discover I don’t own marketable title. Will the title insurance pay me $150,000 or $400,000? –Bill S.
DEAR BILL: Your owner’s title insurance policy will pay you, in the event of a 100 percent total loss, the $150,000 policy limit at the time of your purchase.
However, total title losses rarely occur. In a situation such as you describe, the title insurer will attempt to negotiate a settlement with the title claimant so you will not lose the property.
If that isn’t possible, perhaps because your grantor forged a signature on your deed and the true owner or the heir now claims ownership, the most the title insurer would have to pay you is the $150,000 policy limit in this example.
LONG COMMUTE DOESN’T ENTITLE HOME SELLER TO PARTIAL EXEMPTION
DEAR BOB: In October 2005 I bought my home. But in March 2006 I found an excellent job, which is a 1.5-hour drive from my home. My wife and I have put the house up for sale and are in the process of moving close to my new job. I know that to get the full $250,000 per owner principal-residence-sale tax exemption, we must own and occupy the home 24 of the 60 months before its sale. But what are the tax implications in our situation where after only a few months of ownership and occupancy we have to move due to a long commute? Is this an “unforeseen event” so our expected $20,000 net profit will be tax-free? –Abdoul K.
DEAR ABDOUL: Sorry, a long commute does not qualify as an “unforeseen event” so you can claim a partial principal-residence-sale tax exemption. Your $20,000 net profit will be taxed as ordinary income if you own the house less than 12 months.
If you own it 12 months or longer, then you qualify for the federal long-term capital gain maximum tax rate of 15 percent, plus the applicable state tax. For full details, please consult your tax adviser.
LEASE TERMS DON’T CHANGE WHEN PROPERTY IS SOLD
DEAR BOB: My husband and I own a property that is leased to a business with nine years left on the lease. What legal complications will arise if we sell that property? –Susan K.
DEAR SUSAN: There aren’t any special complications when you sell a property that has an existing lease. The lease terms remain unchanged.
The new owner must honor the terms of the existing lease. The current tenant then will pay the rent to the new owner. You must transfer the tenant’s security deposit to the new owner. Everything else remains unchanged. For more details, please consult a local real estate attorney.
AVOID BUYING A CONDO ON LEASED LAND
DEAR BOB: What was the name of that book you recommended some time ago about buying a condominium? I am thinking of buying a condo in New Hampshire where there are land lease payments, plus association dues. Is this a good or bad deal? –Barbara L.
DEAR BARBARA: The excellent recommended book is “Everything You Need to Know Before Buying a Co-op, Condo, or Townhouse” by Ken Roth. It is available in stock or by special order at local bookstores, public libraries, and www.Amazon.com.
I suggest you avoid buying a condo on leased land. The reason is, as the lease draws to a close, such as in 50 years or longer, the condo becomes worth less and less. When the land lease expires, unless the homeowner’s association has an option to buy out the land lease, the building becomes the property of the landowner. For full details, please consult a local real estate attorney.
HOW TO SURVIVE A BAD LOCAL REAL ESTATE MARKET
DEAR BOB: We own our home in a bad local real estate market. There seem to be no jobs and no money. All our income goes to pay for gasoline and credit card interest. Two out of three houses in our neighborhood are for sale. Please help –Fred W.
DEAR FRED: I’m sure things really aren’t that bad. If you are motivated to sell your house or condo, I suggest a lease with an option to buy. I’ve been using lease-options for more than 25 years, through good times and bad. When structured correctly, lease-options never fail.
However, if you want a fast all-cash home sale for top dollar, under the circumstances you describe, forget it. Details are in my special report, “How to Profitably Use a Lease-Option to Buy or Sell Your Home or Investment Property,” 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.
CAN SISTER FORCE BROTHER TO BUY OUT HER PROPERTY INTEREST?
DEAR BOB: My sister and I inherited two 10-acre parcels as tenants in common. We each own half of each parcel. I live on one parcel and the other one has no public road access. It is landlocked. My sister wants to get an appraisal and then wants me to buy her out or sell the properties. Can she force me to sell? Can the two parcels be appraised separately? –Brett J.
DEAR BRETT: Your sister can force you to sell both parcels in which you are tenant-in-common owners. The legal action is called a partition lawsuit.
However, she cannot force you to buy her out. All she can do is bring a partition lawsuit and the judge can order both parcels sold with the sales proceeds divided between the co-owners.
If you want to keep the parcels, I suggest you somehow come up with enough cash to buy out your sister, such as by refinancing. Or maybe she will accept a mortgage for her half of the equity. Yes, the two parcels can be appraised separately. For more details, please consult a local real estate attorney.
The new Robert Bruss special report, “Five Easy Ways to Buy Your Home or Investment Property for Nothing Down,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
