Real estate fix-up costs for tax deduction clarified

There is no '90-day rule' before sale

DEAR BOB: Last year, I sold a low-income, out-of-state condo for $58,000. Within 90 days before closing, I spent about $4,000 on fix-up and travel expenses. My senior H&R Block tax preparer moved the entire $4,000 from my Schedule D for capital gains to Schedule E for rental income and expenses. The tax preparer used only a few items on my closing statement to adjust the condo’s basis. This $4,000 transfer cost me more in capital gains tax than I expected. Doesn’t the 90-day rule apply? – George R.

DEAR GEORGE: No. There is no “90-day rule” for deducting fix-up costs before the sale of a personal residence or an investment property. That old tax rule was repealed long ago.

Purchase Bob Bruss reports online.

However, if your condo was a rental property, then your $4,000 “ordinary and necessary” repair costs were deductible on Schedule E from the condo’s rental income.

Your tax preparer appears to have been correct. The $4,000 repairs and your travel cost to inspect the condo were definitely not an addition to your condo’s adjusted cost basis, nor should they be subtracted from the condo’s adjusted sales price. Thankfully, with the current 15 percent very low federal capital gain tax rate, there’s no reason to complain.

PROS AND CONS OF “STEPPED-UP BASIS” FOR INHERITED PROPERTY

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DEAR BOB: You recently had several items about the benefits of “stepped-up basis” to market value for inherited property. However, I recently discovered there is also a downside. Although my partner and I were tenant-in-common co-owners, after I inherited his 50 percent of our house by will the tax assessor almost immediately re-assessed the property. The result is my annual property tax will increase over $1,000. Not until I sell the property will I enjoy the stepped-up basis benefit on 50 percent of the market value – Brent W.

DEAR BRENT: You raise an important issue for individuals who inherit property. Although the exact law on property tax reassessments is different in each state, when a non-relative inherits property the assessed value usually is quickly increased so the property tax can be raised. Thanks for pointing out this downside of inheriting real estate, even with a stepped-up basis.

ARE “TENANTS BY THE ENTIRETIES” THE SAME AS JOINT TENANTS?

DEAR BOB: After reading several letters in your column about joint tenants with right of survivorship, I checked the deed to our home. My husband and I own it as “tenants by the entireties.” Is this the same as “joint tenants with right of survivorship?” – Karen B.

DEAR KAREN: Not exactly, but it’s better. As you probably know, when a joint tenant with right of survivorship dies, the remaining joint tenant(s) automatically received the deceased joint tenant’s share without probate. The deceased joint tenant’s will has no effect on his or her joint tenancy assets.

However, about half of the states allow a special form of joint tenancy between a husband and wife. It is called “tenancy by the entireties.”

This special ownership form is better than joint tenancy. The reason is the signatures of both spouses are required to transfer title, refinance or make any title changes.

By contrast, in most states a joint tenant can convey his/her interest without the approval of the other joint tenant(s).

For example, a joint tenant can break up a joint tenancy by conveying their share by a quit claim deed from herself to herself as a tenant in common. The other joint tenant(s) need not be notified. The result is when such a tenant-in-common dies, his/her property share becomes subject to his/her will. For further details, please consult a real estate attorney in your state.

The new Robert Bruss special report, “The Seven Best Ways to Legally Avoid Capital Gains Tax When Selling Your Home or Investment Realty,” 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 PDF download at www.bobbruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

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