DEAR BOB: About a year ago, my elderly mother deeded to me her home and two rental properties I manage for her. Her attorney handled the quitclaim deeds and the recordings. Mother died in October 2006. When I talked to my mother’s tax accountant he said, “It’s too bad your mother deeded the titles to you. If you had inherited those properties, you would have a new stepped-up basis of market value and you would owe practically zero tax when you sell them shortly after her death.” Is this true I don’t get a new stepped-up basis? –Ellen H.
DEAR ELLEN: Yes. Unfortunately, you didn’t inherit those properties. You received the titles as pre-death gifts. As the donee, you took over your donor mother’s probably very low adjusted cost basis for the properties.
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That means, when you sell them, you will owe a large capital gains tax. Unfortunately, your tax accountant is correct.
This situation shows why it is often best, especially when a parent anticipates dying soon, not to deed real estate to a potential heir. The obvious reason is then the prospective heir won’t receive a new stepped-up basis to market value on the date of death.
NO GUARANTEE A VACANT LAND BUYER CAN GET BUILDING PERMIT
DEAR BOB: I am considering buying a vacant lot on which I want to build a home. What assurances can I receive before the purchase that the building permits and site plans will be approved by the local authorities? I do not want to be stuck with a lot on which I cannot build. –Pat E.
DEAR PAT: A buyer of vacant land has no assurances a building permit will be issued, even when the proposed plans exactly meet the zoning and other land-use rules. Depending on the city or county, I’ve seen frustrated developers and landowners stalled for years when neighbors object or variances are required.
For this reason, savvy raw-land buyers can often pay a modest price, typically 1 percent to 3 percent of the purchase price, for a 12-month option to buy the land at a fixed price. That ties up the property and gives the buyer time to apply for the necessary permits. If they can’t be obtained, all it cost the potential buyer was the forfeited option money.
HOW TO MAKE A TAX-DEFERRED TRADE FOR DREAM HOME AND PAY NO TAX
DEAR BOB: I own two rental properties. Let’s call them A and B. I have never lived in either one. Nor do I intend to. Let’s say I sell A and B on the same day and do an Internal Revenue Code 1031 tax-deferred Starker exchange by identifying and purchasing property C. Assume I rent property C for three years and then move in to make it my principal residence for two years. Then I sell property C. If the total capital gains on A, B and C are less than $500,000 (I am married and my wife would live with me in property C for at least two years), can I sell property C without owing any tax? –Tim McW.
DEAR TIM: Yes. But you must hold title to property C at least 60 months because it was acquired in a tax-deferred IRC 1031 exchange. It does not become eligible for the IRC 121 $500,000 principal-residence-sale exemption until you have owned it at least five years, of which at least 24 months it was your principal residence.
At the time of its acquisition, of course, it must be a “like kind” rental property, and the trade must qualify as a tax-deferred IRC 1031 trade up.
Of course, be sure your sales of properties A and B comply with the IRC 1031(a)(3) Starker tax-deferred exchange rules. That means the sales proceeds must be held by a qualified third-party intermediary so you never have “constructive receipt” of the sales proceeds. For details, please consult a tax adviser who is familiar with Starker tax-deferred exchanges.
The new Robert Bruss special report, “2007 Realty Tax Tips-Eight Chapters of Tax Savings for Homeowners and Realty Investors,” 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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