DEAR BOB: I have a follow-up question to the one about renting a principal residence for three years after having occupied it as my primary home for the previous two years. Do I have to depreciate it while renting to tenants? Or can I just deduct on my income-tax returns the mortgage interest, property taxes and other rental expenses? I recall you stating in one of your articles something about the IRS requiring depreciation deductions even if it was previously the owner’s principal residence. If I have to deduct the depreciation on Schedule E of my income-tax returns, I presume I must “recapture” the depreciation and pay tax at the special 25 percent rate when I sell even though I claim $500,000 tax-free profit by using Internal Revenue Code 121. Is this correct? –Charles T.
DEAR CHARLES: Even if you don’t deduct depreciation for a rental house while it is rented, when that property is sold the IRS will “recapture” and tax the depreciation, which should have been deducted during ownership. You might as well enjoy the tax savings resulting from claiming the noncash depreciation deduction, especially if you are in a high income-tax bracket.
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If the principal residence was acquired in an IRC 1031 tax-deferred exchange, it must be owned at least 60 months of which at least 24 months must be owner-occupied if you are to claim the $250,000/$500,000 tax exemption. For full details, please consult your tax adviser.
DISADVANTAGE OF JUST ONE SPOUSE’S NAME ON HOME TITLE
DEAR BOB: My husband and I bought our home with both of our names on the title. However, about 10 years ago when we had our living trusts created, our attorney put the house title into my name only as a way to make our individual estates equal in value. Since my husband’s name is not on the title, can we still claim the $500,000 exemption when we sell? –Eileen McA.
DEAR EILEEN: Yes. Only one spouse’s name need be on the title to claim the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple). To qualify, both spouses must occupy the principal residence at least 24 of the last 60 months before the home’s sale.
However, if your husband dies before you do, don’t expect to receive any stepped-up basis to market value on the date of his death. The reason is you won’t inherit any interest in the house from him. I hate to disagree with a fellow lawyer, but I feel it was a major mistake to take your spouse’s name off the title to the house.
NO NEED TO REFINANCE INHERITED PROPERTY
DEAR BOB: I inherited my mother’s properties, which all have mortgages. I was told by several real estate professionals that I must refinance these loans. Where can I find the law that says, since I am the daughter and will hold title, that I can just change the name on the mortgage as well as the Social Security number for tax purposes? These are single-family rental houses. –Syl C.
DEAR SYL: Whoever gave you that advice requiring refinancing is mistaken. You don’t have to change the name or the Social Security number on the mortgages nor do you have to refinance. Just keep making the payments. Any lender who tries to enforce a due-on-sale clause in the current buyer’s market is crazy.
If the property was owner-occupied, the lender cannot enforce the due-on-sale clause, thanks to the federal Garn-St. Germain Act, since you are a child of the deceased owner.
However, because you don’t live in the property, the lender could try to bluff you into paying an assumption fee. Only if the lender demands an outrageous assumption fee and insists on raising the interest rate should you consider refinancing.
If the mortgages have attractive interest rates and terms, just keep making the payments. Don’t call the lender’s attention to the situation. Your mortgage interest will be tax-deductible because your name is on the property title. It need not be on the mortgage obligation.
The new Robert Bruss special report, “Everything Home Sellers and Their Realty Agents Need to Know About the $250,000 Tax Exemption Rules,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
