DEAR BENNY: Friends of mine recently sold their home they owned for 22 years for $1.5 million; they paid about $500,000. They told me that they did not have to pay any capital gains tax, because their tax advisor claimed that they must have spent at least $1 million on improvements over the 20 years they owned it, although they did not have any records. He told them that it was within IRS guidelines, and their tax return was accepted without any problems.
Do you have any knowledge of those IRS guidelines? It is important for me because the existence of such guidelines will determine if I should sell my home or not. –Russ
DEAR RUSS: Hopefully, your friend did not get audited by the IRS. Although there may be an IRS ruling, I know of none.
A good source of information can be found in IRS Publication 523, entitled "Selling Your Home," which is available from the IRS Web site.
Basis is basically what you paid for your house. Adjusted basis adds any improvements that you made over the years. The best definition of an improvement is that which adds to the value of your home and prolongs its life. Publication 523 provides a number of examples: "adding a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring. …"
However, repainting your house inside or out, fixing your gutters or floors, or repairing broken windows are considered "repairs" and will not increase basis.
The IRS provides a caveat: Adjusted basis does not include the cost of improvements that are replaced and are no longer part of the home. For example, 15 years ago you installed wall-to-wall carpeting. Later you replaced that carpeting. While the cost of the new carpets is an "improvement," you cannot include the cost of the old carpeting.
If you have pictures of your house before and after you made improvements, you may be able to convince an IRS agent to allow some of the estimated cost as an improvement. But as far as I am concerned, if you do not have sufficient documentation, you will have an uphill fight should you be audited.
DEAR BENNY: I plan to purchase a home at a foreclosure sale. I think I can get it cheaper that way than buying it from the current owner. But I want to rent it to the current, soon-to-be former, owner. He’s a bullheaded dunderhead, but he’s family and I want to help him out. Once he gets back on his feet I might sell it back to him. However, I’m told that it is illegal to foreclose on a home and then rent it to the former owner. –Gene
DEAR GENE: There are a large number of predators throughout the United States that prey on homeowners who are in financial trouble. Some of these characters outright lie: They tell the homeowners that they are going to lend them the money they need to stop a foreclosure and all they have to do is sign a promissory note and a deed of trust. But the unwitting homeowner does not realize that he or she is actually signing over a deed to the house. There have been many lawsuits against these individuals that have resulted in the deed being thrown out and the house restored to the original owner.
There are other people who will buy homes from financially distressed homeowners, and let them rent the house back for a fixed term. Typically, the sale price is the amount of the current mortgage, with a little extra thrown in. The arrangement gives the homeowners the ability to buy back the house when their financial situation gets better. But often the repurchase price is steep — and way above the real market value.
Many states have adopted legislation prohibiting (or at least restricting) this "buy-back" provision. You would have to talk with an attorney in your area to get an opinion on whether your plan will work.
Since you will be buying the house at a foreclosure sale, I do not think that any such laws will impact on you. But you should confirm this with your attorney.
I have a say that you are either a saint or a "dunderhead" also. You want to rent the house back to the family that is about to lose the house. If you are legally permitted to do this, make sure that you have a strong lease, that you understand and comply with the landlord-tenant laws in your state, and that you satisfy yourself that your prospective tenant will be able to make the monthly payments.
DEAR BENNY: I read your column with interest (as I do every week) regarding wills, etc. You mention that "everyone over the age of majority should have at least four legal documents: a last will and testament, a durable power of attorney, a power of attorney for health, and a living will (also known as an advanced healthcare directive)."
I would appreciate your defining three of the four documents (I am familiar with last will and testament). I thought an advanced directive is the same as a power of attorney for health. And does a durable power of attorney refer to financial matters?
This is a very interesting subject for me as I thought we had all the proper documents and now I’m not so sure. –Patricia
DEAR PATRICIA: A rose by any other name is still a rose. You can use a durable power of attorney for health purposes, so long as it contains language giving the holder of the power the authority to make health decisions on your behalf. But I prefer to have separate documents. Often, you may want one person to have the power for general and financial matters, but someone else to handle the health issues. For example, if you have grown up children, you might want to give your spouse the power to sign checks, or sell your stocks or your house, but you would want your children to handle your health concerns.
Advanced healthcare directives are legal documents that give instructions on what healthcare a person desires to have when he or she is unable to make decisions. An advance directive may include both the appointment of an agent (or proxy) to make medical decisions, as well as specific instructions on what type of care and treatment the individual wishes to have. Although all of these issues can be rolled into one document, I generally recommend that you have two separate documents: one to name a person to make decision on your behalf regarding your health (the durable health power of attorney), and one spelling out what medical care — if any — you should be given if your doctors believe that you are about to die. Do you want your life to be sustained at all costs? Do you want to be resuscitated if your heart stops beating? In effect, do you want that "plug" to be pulled?
Every state has different forms for these documents, and it is advisable to use the appropriate form. You would not want a doctor (or the attorney for a hospital) to challenge your document claiming technicalities.
So, while you may incorporate the living will and a durable power of attorney into one advance directive, I still believe that it is better to prepare separate documents.
DEAR BENNY: I had a listing agreement with a Realtor for several multifamily properties last year. In November, I asked for and received a written release on all listings. The properties are in Wisconsin. Because I was going to be in Florida for the winter, I did not want to deal with it. And besides, not much happens with sales in northern Wisconsin in the winter anyway.
Now I have been contacted by an interested buyer that looked at one of the properties during the listing period. How long after I have received a written release from the listing am I obligated to the Realtor for a commission if I sell to someone who originally looked at the property while they had it listed?
I’ve been told one year and also six months both by different real estate agents. –D.E.
DEAR D.E.: First, I would have to review the release that your agent signed. This may resolve the issue. When a person signs a general release, that means each party completely releases each other; unless there is some exception contained in the release agreement, neither party has any further claims.
I have done a quick survey, and it appears that some states limit the so-called "protection period." In fact, in Wisconsin, I understand it can run for one full year after the listing period has ended.
The real estate agent can also try to argue that she was the procuring cause and might want to file a lawsuit against you for the commission. However, I believe that the release should resolve the matter in your favor.
This is not an easy issue. As we all know, when there are two lawyers, there may be as many as three different opinions. You should consult a local attorney in Wisconsin who can give you a more specific answer after reviewing the release document.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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