DEAR BOB: My wife died last August after a long illness. I plan to eventually sell our longtime house because it is far too big for me alone. But my daughter says if I don’t sell by Dec. 31, 2004, I lose my $500,000 tax exemption. Is this true? – Raymond H.
DEAR RAYMOND: Please don’t despair. This is a technical problem with Internal Revenue Code 121 because 2004 is obviously the last tax year you can file a joint income tax return with your late wife.
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As you probably know, a married couple filing a joint income tax return is entitled to a principal residence sale tax exemption up to $500,000. Internal Revenue Code 121 requires them to have owned and occupied their home at least two of the last five years before its sale.
However, if you and your late wife jointly co-owned your home, you probably inherited her half of the residence. That means you received a new “stepped-up basis” on her half of the home. If you live in a community property state, you received a new stepped-up basis on the home’s entire market value.
Only if the house title was held in your name alone will you be unable to take advantage of this stepped-up basis rule. For full details, please consult your tax adviser.
FARM OWNER HAS A $10,000 INSURANCE DEDUCTIBLE
DEAR BOB: A few weeks ago you had an item about homeowner’s insurance policy deductibles and why it pays to increase the deductible amount to save premium dollars and avoid insurance claims. Last year I increased my deductible to $10,000 on my house and farm. At first, my insurance agent balked. But then he checked the rates and showed me how much I would save. My mortgage lender, one of the biggest nationwide banks, didn’t complain. Just thought you should know – Brian W.
DEAR BRIAN: Thanks for that profitable information. As long as you can afford to pay the small losses up to $10,000, your insurance company will be very happy. However, most of us are not in a financial position to pay such large deductibles.
ONLY ONE WAY TO AVOID TAX ON LAND SALE
DEAR BOB: My father and his brothers, ages 82, 85 and 87, together own a small farm of 45 acres. Because of their ages, they want to sell. Is there any way they can avoid capital gains tax on the sale of the property? – Linda D.
DEAR LINDA: The only way to avoid tax on a profitable sale of property that is not the sellers’ principal residence is to make an Internal Revenue Code 1031 tax-deferred exchange for another “like kind” investment or business property of equal or greater value and equity. For full details, they should consult their tax adviser.
The new Robert Bruss special report, “Everything Homeowners Need to Know About the New $250,000 and $500,000 Home Sale Tax Exemption Rules,” 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 Interned delivery at www.bobbruss.com. Questions for this column are welcome at www.bobbruss.com.
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