Editor’s note: Robert Bruss is temporarily away and will return next week. The following column from Bruss’ “Best of” collection first appeared Sunday, June 25, 2006.
DEAR BOB: My son and his wife live in a free-and-clear house that I own. He pays utilities and maintains the property. He proposes I add both their names to the title so that in 24 months we can sell the property and he would then purchase — in his name only — a more expensive home. My son says no tax will be due on such a sale under that $500,000 tax exemption rule you often discuss, and the sale isn’t even reportable to the Internal Revenue Service. I realize I would be passing on the value of the home to him, but I am not confident of the tax situation. Is he correct? –James S.
DEAR JAMES: When you gift the house to your son and his wife, that event requires you to file a federal gift tax return. However, no gift tax will be due if your total lifetime gifts exceeding the annual $12,000 per gift per donee exemption are not more than $1 million.
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When you pass on, the value of your gift will be subtracted from your federal estate tax exemption, which is currently $2 million if you die in 2006.
As donees, your son and his wife will take over your presumably very low adjusted cost basis for the house. If they own and live in the home as their principal residence at least 24 of the 60 months before its sale, Internal Revenue Code 121 allows them to exclude up to $500,000 capital gains (up to $250,000 for a single homeowner) from tax upon sale.
Your son seems to be very sharp about the tax benefits of his acquiring ownership in the house. But before making any title transfer, please consult your personal tax adviser so you are fully aware of the tax consequences.
JOINT LISTING PROVES TO BE A DISASTER
DEAR BOB: In late April we listed our home for sale. Because two very good friends are real estate brokers, we signed a joint listing with both of them. Little did we know they hate each other’s guts and speak to each other only when absolutely necessary. It is a six-month listing. Although we were assured we listed at the correct asking price, we haven’t received any purchase offers or serious buyer interest so far. Since these agents work at different brokerages, neither one will hold a Sunday open house or even advertise our listing in the newspapers. What should we do? We already lost two good friends –Brooke W.
DEAR BROOKE: Joint listings with two competitive real estate agents rarely are successful, especially when each agent works at a competing brokerage. Those co-listing agents weren’t really your friends if they can’t get along to get your home sold for top dollar.
I am not surprised they refuse to cooperate on joint advertising or to hold weekend open houses. Each co-listing agent is probably worried the other listing agent will find an acceptable buyer and earn most of the sales commission.
But shame on you for signing a long six-month listing. As regular readers of this column know, a 90-day listing is the maximum suggested term to keep your listing agent highly motivated to find a buyer.
At this point, I suggest you ask the co-listing agents, and your former friends, to terminate their listing so you can re-list with another agent. Be sure to emphasize to each agent if they have a buyer for your home, they can still earn half of the sales commission. In the future, never sign a listing exceeding 90 days, especially with friends.
JOB TRANSFER ALLOWS PARTIAL HOME-SALE TAX BREAK
DEAR BOB: We bought our home in February 2005. At that time, my husband had just accepted a new job and we expected to stay at least five years, maybe “forever.” However, his employer filed Chapter 11 bankruptcy reorganization a few months ago. Although he still has a job, things look “dicey.” Meanwhile, word got around his industry and he recently received a superb unsolicited job offer at a much higher guaranteed salary for five years, plus moving benefits, bonus, etc. Our only problem is if we sell after less than 24 months of home ownership, we will owe capital gains tax on the tremendous increase in market value of our home. I recall you wrote about “unforeseen circumstances” as a reason the IRS grants partial principal residence sale tax exemptions. Would this qualify? –Jeanie T.
DEAR JEANIE: Yes. Your circumstance probably qualifies under the Internal Revenue Code 121 principal residence sale partial exemption for both job transfer and unforeseen circumstances. Using this exemption, when selling a principal residence after less than 24 months of ownership and occupancy, the sellers are entitled to a partial exemption based on the number of occupancy months.
For example, suppose you owned your principal residence and you qualify for one of the partial exemption rules for home sale (health reasons, employment change, or unforeseen circumstances). Then your exemption is based on the number of ownership months and occupancy.
If you sell after 20 months, that means you qualify for 20-24ths or about 83 percent of the $250,000 exemption ($500,000 for a married couple filing jointly. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Probate Property Profit Secrets Revealed,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 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.