DEAR BOB: If my partner and I sell our jointly owned home, will we owe capital gains tax if we sell before owning it for two years? We will probably each make about $50,000 profit –Gina B.
DEAR GINA: The fact you are not married to each other is irrelevant. What matters is both names are on the title to your principal residence, and you are selling before owning and occupying it at least 24 of the last 60 months before its sale.
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If you can meet that test, Internal Revenue Code 121 provides up to $250,000 tax-free capital gains for each co-owner.
However, IRC 121 specifies if the reason for the principal-residence sale after less than 24 months of ownership and occupancy is a health reason, change of employment location qualifying for the moving-cost tax deduction, or “unforeseen circumstances,” each qualified co-owner might be eligible for a partial deduction.
To illustrate, suppose the reason for selling your home is change of employment location at least 50 miles further away from your home than your current job site. Let’s also suppose you each owned and lived in the residence 12 months. Therefore, each co-owner would be eligible for up to $125,000 (50 percent) of the $250,000 tax-free home-sale profit exemption in this example. For full details, please consult your tax adviser.
EVERYONE SEEMS HAPPY WITH $250,000 HOME-SALE TAX BREAK
DEAR BOB: I heard there is talk of changing the Internal Revenue Code 121. Is this true? –Kathleen B.
DEAR KATHLEEN: No. Most home sellers are very happy with IRC 121. The only proposal in Congress of which I am aware is to raise the $250,000 principal residence sale tax exemption. But, due to the federal budget deficit, chances of that happening anytime soon are slim to none.
HE OR SHE WHO MAKES THE PAYMENT GETS THE DEDUCTION
DEAR BOB: I am going to refinance my home and want to add my girlfriend to the mortgage. Should we be “tenants in common?” Since both of us will be responsible for paying the mortgage, can we both claim the interest deduction on our tax returns? –Mike T.
DEAR MIKE: If you are not married, but both of you hold title to the residence, then the individual co-owner who actually pays the mortgage interest and/or property tax payments is entitled to deduct that total amount on his or her individual tax return. As for the best way to hold title, please discuss that with a local real estate attorney.
Both names must be on the title if you each are to claim the deductions you each pay. Be sure to keep your cancelled checks to prove your individual payments. Your tax adviser can give you further details.
WILL LEASE-OPTION GET A CONDO “SOLD”?
DEAR BOB: My condominium has been listed for sale over two months with a very fine Realtor. But the local market seems “slow.” She has held a “broker’s tour,” advertises it every week, has it listed in the local MLS (multiple listing service) and on the Internet, and holds a Sunday open house twice a month. Although the condo interior is very nice, especially since it is “staged” to show its best, the problem is the condo’s street “view” isn’t very attractive. I’ve reduced the asking price twice. After showing her your recent item about how you’ve used lease-options to “sell” homes, she said lease-options don’t work and she wouldn’t even consider advertising it as a lease-option. Any suggestions to get my condo sold? –Byron A.
DEAR BYRON: Most Realtors have never done a lease-option. Your Realtor probably doesn’t understand the lease-option benefits for seller, buyer and agent.
When selling a house or condo “the regular way” doesn’t work, my experience has been a properly structured lease-option always works to get the home “sold.”
As I often tell listing agents, it’s better to do a lease-option and earn part of your commission up-front and the balance when the option is exercised than to earn nothing when your listing expires unsold. 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 delivery at www.BobBruss.com.
CAN EX-SPOUSE FORCE SALE OF VACATION CONDO?
DEAR BOB: My friend went through a divorce about a year ago. Her ex-husband convinced her to do an Internal Revenue Code 1031 tax-deferred exchange. She bought a ski condo with him and their son. They have no written agreement on when to sell or other specifics. The college-age son takes care of the rentals. My friend wants to sell her interest in the ski condo. Is there any way she can force her ex-husband to buy her out? –Jessica W.
DEAR JESSICA: No. Without a written partnership agreement, including a buy-out arrangement, your friend can’t force her ex-husband to buy her out, other than by begging and pleading.
But she can bring a “forced sale.” The legal term is a partition lawsuit.
Your friend can get a court order in the county where the condo is located ordering the sale of the condo, with the sale proceeds divided among the co-owners.
For details, she should consult a real estate attorney in the county where the ski condo is located. As a practical result of filing the lawsuit, if the ex-husband wants to keep the condo (perhaps because of the deferred capital gains tax which would become due), he might agree to buy her out.
IS A PROPERTY GIFT SUBJECT TO FEDERAL GIFT TAX?
DEAR BOB: You frequently advise against parents making lifetime gifts of property to their children. If they went against your advice and did that, wouldn’t the value of the home be subject to gift tax? –Marlene M.
DEAR MARLENE: Possibly. If total nonexempt gifts of the parents exceed the lifetime $1 million per person federal gift-tax exemption, the property gift will be subject to gift tax.
Even if no gift tax is due, if the annual gift from each donor per donee exceeds $12,000, a federal gift tax return must be filed. The amount of the nonexempt gift is subtracted from $1 million lifetime exemption for each donor, thus reducing their gift-tax exemption and their federal estate-tax exemption (currently $2 million).
Also, the donees should be aware they must take over the donors’ presumably low adjusted cost basis for the home. If they instead inherit the property, they receive it with a new “stepped-up basis” to market value on the date of the last decedent’s death. For details, the parties should consult their tax advisers.
ARE “INTEREST ONLY” HOME LOANS “ALL BAD”?
DEAR BOB: I have around $300,000 “idle equity” in my home. My current mortgage balance is only about $34,000. Although I am retired and in good health, I am “only” 64, so a reverse mortgage won’t give me much because I am too young. I have a decent retirement income, but not enough to afford to go with my friends on cruises and afford other frivolous expenses like a new car. The wonderful banker at my community bank, where my late husband did business for many years, suggests I get a 30-year fixed-rate mortgage with “interest only” payments for the first 10 years. There is no negative amortization, which you often warn about. He says I can easily afford the monthly payments, even after they “adjust” in 10 years to pay off the loan in 20 more years. My children advise against it. Your opinion please –Mavis R.
DEAR MAVIS: Go for it! Enjoy your home equity. Your selfish children know you will be spending their inheritance so they want to discourage you from fully enjoying your retirement while you are still in good health.
There is nothing “all bad” with an “interest only” home loan that has no negative amortization. The mortgage you describe sounds ideal as long as you can afford the monthly payments on your retirement income, both now and in 10 years when the monthly payment adjusts.
The type of mortgage that gets homeowners in financial trouble is the so-called “option mortgage” where the monthly payments are so low they don’t even pay the interest. When that happens, the lender adds the unpaid interest to the mortgage balance, resulting in negative amortization where the borrower owes more than the original balance.
The new Robert Bruss special report, “The 20 Essential Questions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’s Market,” 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 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).
