DEAR BOB: For the last three years we have owned our condo in what was once an upscale condominium complex. But mismanagement by the board of directors has allowed it to decline rapidly in maintenance quality and ambiance. Too many renters have been allowed to move in. They park their campers in the parking lot and the place looks like low-income housing. Fortunately, the market value has held up because of a very desirable location. My husband and I have decided to sell and move to a better condo complex. If we sell, our net profit will be about $145,000. Because we plan to buy another condo of greater cost, will our profit be tax-free? – Clara H.
DEAR CLARA: Yes, but not for the reason you expect. The old “rollover residence replacement rule” of old Internal Revenue Code 1034 was abolished in 1997.
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But it was replaced by the much better principal residence sale rule of Internal Revenue Code 121. Today, if you have owned and occupied your principal residence an “aggregate” two of the five years before its sale, up to $250,000 (up to $500,000 for a married couple filing a joint tax return) of your capital gain is tax-free.
Presuming the condo you describe is your principal residence and it was your primary residence at least two of the five years before its sale, your $145,000 capital gain easily qualifies for this tax exemption. But there is no need to buy a replacement home. For full details, please consult your tax adviser.
IS MORTGAGE INSURANCE PREMIUM TAX DEDUCTIBLE?
DEAR BOB: We bought our house for zero down payment in December 2003. But we pay a very stiff monthly PMI (private mortgage insurance) payment of $123 per month. Will we be able to deduct our PMI payments on our 2004 income tax returns? If not, I think we should refinance with a mortgage that doesn’t require PMI. Your advice please – Sharon V.
DEAR SHARON: Unfortunately, the 2004 Congress did not change the tax law, as was proposed, to allow about 12 million homeowners to deduct their PMI, FHA, and even VA mortgage insurance payments as deductible interest.
Maybe it will happen in 2005. This issue will be back in 2005 because the mortgage insurance industry wants PMI premiums to become tax deductible just like mortgage interest. Meanwhile, you will be better off by refinancing with a non-PMI mortgage.
ARE TENANT IN COMMON (TIC) INVESTMENTS A “GOOD DEAL?”
DEAR BOB: I have been approached by several companies offering tenancy in common (TIC) investments in commercial properties. I can invest as little as $20,000 to obtain the benefits. What excites me is they say I can sell my apartment building and invest the proceeds in a TIC as a tax-deferred exchange and just collect the monthly checks. That sounds wonderful to me with no tenants. What’s the catch? – Hilda H.
DEAR HILDA: TIC investments have only been around a few years. But they are ideal for your situation to (1) defer tax on the profitable sale of your apartment building, (2) create a tax-deferred exchange, and (3) provide future monthly income from a leased investment, such as a franchised restaurant.
For example, my friends Dory and Andy sold their rental house and made a tax-deferred exchange into a TIC partial ownership of an Applebee’s Restaurant in Kentucky. Each month they receive a check for their share of the net income from that property. As retirees, they are very happy.
However, if a problem develops, such as the neighborhood goes bad and the Applebee’s franchisee goes broke, that TIC property might become worth far less than its original value. I’m sure you get the idea.
With a TIC investment, you are at the mercy of the property investment management firm. Please consult your attorney before investing in a TIC.
The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Seller Mistakes,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.
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