DEAR BOB: I sold my principal residence in January 2006 with a capital gain of about $400,000. The same day, I bought another house using the profit as a down payment. I was single until April 2006. Mine was the only name on the title to the house that was sold. But my partner (now wife) and I had been splitting the mortgage payments for more than 24 months. It was our primary residence for more than two years before the sale. Can we file jointly and receive $500,000 capital gains tax deduction? –Tim C.
DEAR TIM: You can file a joint tax return because you are now married. But that won’t help you increase your Internal Revenue Code 121 principal-residence-sale tax exemption above $250,000. The fact you bought another house is irrelevant.
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Of course, you are entitled to a $250,000 home-sale tax exemption under IRC 121 because you owned and occupied your principal residence more than 24 months during the last 60 months before its sale.
However, your girlfriend who also occupied the primary residence cannot qualify for a $250,000 exemption, although she paid half of the mortgage payments, because (1) she was not married to you at the time and (2) her name was not on the title.
Nor is she entitled to any tax deduction for the half of the mortgage interest she paid. The reason is she had no legal obligation to make those payments.
If her name had been on the title, however, then she would have been legally obligated and entitled to a tax deduction for the share of mortgage interest she paid. It’s unfortunate, but you and she did everything wrong. You owe capital gain tax on the $150,000 exceeding your $250,000 exemption. For more details, please consult your tax adviser.
ARE LENDERS REQUIRING LOW-BALL APPRAISALS ON REFINANCES?
DEAR BOB: I saw that recent item in your column about the abnormally low appraisal on a condo refinance. As I recall, the lender’s appraiser estimated a market value $157,000 below the appraised value by the second appraiser hired by the condo owner. I had a similar bad appraisal experience with the major nationwide lender who claims to be the nation’s largest. Since I have a 745 FICO score and good income, my qualifications for the refinanced 75 percent loan-to-value mortgage were not at issue. The appraiser hired by the lender told me, point blank, she was expected to appraise at least 10 percent below market value. But I was so shocked by her low appraised value of my home, despite three comparable nearby sales within the last four months for at least $35,000 more each, I demanded a reappraisal. The lender refused. So I refused to pay the appraiser her $450 fee for the dishonest appraisal. I then refinanced with another lender who used an honest appraiser. Are lenders now requiring low-ball appraisals on mortgage refinances? –Helene W.
DEAR HELENE: Based on your experience and other readers who responded, it appears some mortgage lenders have become ultra-cautious about appraisals for mortgage refinances.
Although it is against appraisal rules for a lender to instruct appraisers to “hit the number” or “low-ball” appraisals, it appears that is happening. If enough borrowers like you refuse to accept low appraisals, lenders will stop their illegal tactics.
“LIKE KIND” TAX-DEFERRED EXCHANGE DOES NOT MEAN “SAME KIND”
DEAR BOB: In a recent article you correctly said Internal Revenue Code 1031 tax-deferred exchanges must involve a trade equal or up in both price and equity. But you mistakenly went on to say the replacement property must be a “like kind” property. The current rule allows an exchange of any property held for investment purposes. Thus, an apartment building can be traded for bare land, etc. Please make this correction for the benefit of your readers and my clients, as I am a real estate agent –Jim S.
DEAR JIM: You should be aware the tax term “like kind” does not mean “same kind” of property when referring to IRC 1031 tax-deferred exchanges.
“Like kind” means the qualified property must be held for investment or use in a trade or business. Virtually every property can qualify except (1) a personal residence or (2) dealer property, such as a home builder’s inventory of houses.
To illustrate, an investor can make a “like kind” trade of a rental house for a warehouse, or an apartment building owner can make an IRC 1031 “like kind” tax-deferred exchange for a shopping center, as long as the trade is equal or up in price and equity without receiving any cash “boot,” which is taxable “unlike kind” property.
WHAT IS AN UNNECESSARY MORTGAGE “JUNK FEE”?
DEAR BOB: I am in the process of refinancing my mortgage. What fees are unnecessary junk fees? –Darrin B.
DEAR DARRIN: The definition of a mortgage lender’s unnecessary junk fee is any lender charge that is not for a specific service. Examples of legitimate lender fees include appraisal fee paid to the appraiser, title insurance paid to the title insurer, and credit report fee paid to a credit bureau.
But a junk fee is nonspecific, often for vague services that do not benefit the borrower. Examples of unnecessary junk fees include creative names such as administrative fee, documentation fee, warehouse fee, underwriting fee and loan review fee. Those services should be included in the mortgage interest rate.
FIVE-YEAR HOME OWNERSHIP NOT REQUIRED FOR $250,000 TAX BREAK
DEAR BOB: I don’t understand the 60 months part of Internal Revenue Code 121 for home sales. Can I own my home for 24 months, live in it as my primary residence, and qualify for the $250,000 sale exemption? Or must I own the home for 60 months and live in it for 24 out of those 60 months? –John C.
DEAR JOHN: Unless you acquired your principal residence in an Internal Revenue Code 1031 tax-deferred exchange, you do not have to own it for 60 months before qualifying for the IRC 121 principal-residence-sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return).
At a minimum, to qualify for the capital gain tax exemption, you must have owned and occupied your principal residence at least 24 months before its sale. That means you could have purchased it as recently as 24 months before its sale if you occupied it as your primary residence for those 24 months. Please consult your tax adviser for full details.
TITLE TRANSFER NOT EASY WITHOUT LIVING TRUST OR JOINT TENANCY
DEAR BOB: My late mother and I owned a house together as tenants in common. Her written will left everything to me, her only offspring. When I went to see a local probate attorney, she said it would take at least six months and cost me about 5 percent of my mother’s modest estate to transfer everything to me. Is this true? –Sophie R.
DEAR SOPHIE: Unless your late mother’s estate qualifies for an exception to the probate requirements in the state where she was a resident, the probate attorney is probably correct the estate is subject to jurisdiction of the local Probate Court.
The only easy title transfers without probate after a property owner dies are if the title was held in joint tenancy with right of survivorship or in a revocable living trust. Then probate court jurisdiction does not apply.
As for the probate attorney’s fee of 5 percent of the gross estate, each state has a maximum statutory fee depending on the estate’s total valuation. However, that fee is negotiable downward.
If the attorney thinks you will take your business elsewhere, she is very likely to reduce her fee substantially unless there are complications, such as a contested will.
YOU CAN RENOUNCE INHERITANCE EVEN VULTURES REJECT
DEAR BOB: My father died in 2006. He left behind six adult children. I don’t think he liked me very much. So he left me his worst property, out of the 26 he owned at the time of his death. It is a vacant, vandalized slum property that was once a nice house. I checked with five nearby Realtors and they all agree it will be very difficult or impossible to sell without extensive fix-up. They said even “vulture buyers” don’t want it. There is about $7,500 of unpaid property taxes. Otherwise, it is free and clear. I don’t want to fix it up nor do I need the money from selling the property. How can I avoid getting involved? –Wally C.
DEAR WALLY: You can renounce your inheritance of that property by notifying the estate executor or court-appointed administrator in writing. After you renounce your inheritance of that property, it will then pass according to the terms of the will to another heir.
Be sure to do this promptly before the probate court distributes that property to you according to the terms of the will. After title transfers to you, then you become the owner and getting rid of that property could be difficult.
The new Robert Bruss special report, “When It’s Smart to Prepay or Refinance Your Mortgage,” 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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