DEAR BOB: I am buying my first home in the next couple of months from my aunt and mother. They’re inheriting my grandmother’s home, but neither of them wants to keep it. What is the best way to go about this family purchase? –James M.
DEAR JAMES: Your aunt and mother first need to obtain marketable title from your grandmother’s estate. This is very important. The reason is their adjusted cost basis is the home’s market value on the date of grandmother’s death.
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If they sell the house to you shortly thereafter, for the same market value, they will owe zero capital gains tax.
Of course, as a prudent buyer, be sure a reputable real estate attorney or title company handles your purchase and you obtain an owner’s title insurance policy showing you acquired marketable title.
If the house is free and clear with no mortgage to be paid off, you might ask your aunt and mother if they would like to finance your mortgage so you don’t have to obtain a mortgage from an outside lender.
Because they know, trust and love you, they are likely to say “yes.” Offer them a fair interest rate, which is perhaps 6 percent in today’s market. That’s a great investment for them and easy financing for you.
By carrying back the mortgage for you, they will be creating excellent mortgage interest income for themselves, secured by the house. If you default, they can foreclose and get the house back to sell to someone else.
GET A PROFESSIONAL APPRAISAL FOR A DIVORCE BUY-OUT
DEAR BOB: My husband and I own a house worth about $375,000. It has a water seepage problem. We are in the process of a divorce and want to sell the home in the early spring. We are trying to fix the water problem before then. But I am hoping to buy him out. How should I go about doing this? –Marian R.
DEAR MARIAN: Sorry, I can’t help you with that water seepage problem. But divorce buy-outs by one spouse are very common. The first step is to get a professional appraisal of the house so you both can agree on the home’s fair market value.
Be sure both parties agree on the selection of the appraiser. If that’s not possible, an alternative is for each spouse to hire his/her own licensed appraiser and then average the two appraisals to arrive at a fair market value.
As for financing your buy-out of your husband’s share of the property, this is usually done by refinancing the mortgage (unless you have lots of spare cash!).
When agreeing on the buy-out amount, don’t forget to reduce the home’s market value by the amount of selling expenses that will be saved, such as the realty sales commission and transfer costs. Be sure your divorce attorneys review and approve the buy-out agreement.
TAX-DEFERRED EXCHANGE DOESN’T APPLY TO PERSONAL RESIDENCE
DEAR BOB: Within the next year, I want to sell my home and move to a better climate. But my problem is I am single so I only will have a $250,000 tax-exemption. However, my estimated home sales price will be around $425,000. Can I use one of those tax-deferred exchanges you write about to avoid tax? –Carl T.
DEAR CARL: A tax-deferred exchange is appropriate for rental properties. But that is not your situation.
You left out a key fact. What is your adjusted cost basis for the home?
That is usually your purchase price, plus most closing costs you didn’t deduct in the year of purchase, plus capital improvement costs, minus any depreciation deducted, such as for business use of your home. Subtract your home’s adjusted cost basis from the net (adjusted) sales price to arrive at your capital gain.
For example, suppose $125,000 is your home’s adjusted cost basis and $400,000 is your net adjusted sales price after subtracting selling costs. The result is a $275,000 long-term capital gain (presuming you owned and occupied your home at least 24 of the last 60 months before its sale).
Applying your $250,000 principal-residence-sale tax exemption, thanks to Internal Revenue Code 121, means you have only a $25,000 taxable capital gain. At the current federal 15 percent maximum capital gain tax, plus applicable state tax, that’s a genuine bargain. For more details, please consult your tax adviser.
The new Robert Bruss special report, “When It’s Smart to Prepay or Refinance Your Mortgage,” 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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