DEAR BENNY: I recently purchased a 5-year-old house and when I signed the residential purchase agreement there was a provision for the seller (a bank) to provide a one-year home warranty plan, for a price not to exceed $350. Since the close of escrow (also called settlement or closing in many states) and officially turning over the keys, I have not received the warranty.
My real estate agent essentially is saying that the warranty was never "officially" taken out (despite the agreement), and the listing agent is leaving the matter in the Realtor’s hands. I’ve been unsuccessful in bringing this to a resolution; do you have any suggestions? –Mike
DEAR MIKE: Yes, you should send a letter to the bank, and include a copy of the sales contact highlighting the warranty requirement. Send a copy to your state’s attorney general, your state’s banking commission and the United States Office of the Comptroller. That should do the trick.
However, my experience is that those warranties are not always worth the cost. You have to read the fine print because there are many loopholes. But since the bank has to pay for it, you might as well put some pressure on the bank.
DEAR BENNY: This could be a tax dilemma: There is a contract for auction of real property (my mother’s home) dated Feb. 18, 2011, between the auction company and signed by me, her daughter, as power of attorney. The property consisted of two parcels: (1) a number of acres of vacant land purchased in 1963 and (2) the home purchased in 1939. Both purchases were made by my mother and father. My father died in 1976.
The auctioneer was contacted by a buyer willing to buy the vacant land, and he presented this offer to me on Feb. 25, 2011. (This buyer was not interested in the parcel containing the home.) I accepted the offer, and the vacant land was sold for cash on March 16.
My 95-year-old mother moved to a retirement home in June 2010 after a heart-related problem and planned to stay there through the winter, but intended to return to her home in the spring. She fell in early January 2011 and had to go into assisted care. After a three-month decline, she died unexpectedly on March 24. After her fall we had decided to sell the property to pay for her care.
The auction for the home had already been scheduled and advertised for April 9. It was conducted as scheduled and the home was sold. My brother and I are the sole heirs, and I am the estate executor.
My questions: (1) Can the $250,000 home-sale exemption be used for tax year 2011? (2) Since both parcels adjoin and were used as part of the home, do they qualify as one sale under the $250,000 exemption? –Mary Ann
DEAR MARY ANN: You have raised a three-part question: the taxable consequences of (1) the sale of the vacant land while your mother was alive; (2) the sale of the home after her death; and (3) whether the lot can be included in the up-to-$250,000 exclusion of gain for single taxpayers (or up to $500,000 if taxpayers file a joint tax return).
I was not sure of the answer to question No. 3, so I went to the Internal Revenue Service website (www.irs.gov). In Publication 523, "Selling Your Home," I found the following language: "To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale."
Land. If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land.
Example: You buy a piece of land and move your main home to it. Then, you sell the land on which your main home was located. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.
Vacant land. The sale of vacant land is not a sale of your main home unless:
- The vacant land is adjacent to land containing your home,
- You owned and used the vacant land as part of your main home,
- The separate sale of your home satisfies the requirements for exclusion and occurs within two years before or after the date of the sale of the vacant land, and
- The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land.
If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale, and only one maximum exclusion can be applied to any gain.
So, the answer to No. 3 and No. 1 is that the exclusion of gain regarding the vacant lot is not applicable.
As to question No. 2, you and your brother can take advantage of the "stepped-up" basis. In other words, the value of the home on the date your mother died is your tax basis. If you sell for that price, there is no gain. Anything above that price is taxed by the IRS at the capital gains rate, which currently is 15 percent (and any applicable state and local tax).
DEAR BENNY: You frequently write about the stepped-up basis when a property is inherited. In today’s market, however, you may find the reverse situation. For example, let’s say I purchased a house for $600,000 several years ago. The current value is $400,000. If my children inherit the house, can they keep the $600,000 base or do they have to lower the base to the new present market value of $400,000? If they sell the house for $400,000, can my children divide up this $200,000 loss and use it on their individual tax returns? –Art
DEAR ART: The heirs cannot take a loss when they sell the property for less than their "stepped down" basis unless the property is held for investment, in which case they can offset the loss against any capital gains, and deduct an additional $3,000 per year of excess losses.
I am not sure what you would need to do to convert the property into "investment" property in these circumstances (or whether estate property is automatically treated as such if the heirs don’t live in it as their principal residence). I believe the answer is that the property retains the same character as it had when held by the decedent, which was not for investment, but I welcome guidance on this technical issue from my readers.
DEAR BENNY: We homeowners are having quite a problem with our board. A few weeks ago all homeowners got a letter asking for us to vote yes or no on putting a satellite dish in the clubhouse; the understanding was that any unreturned ballots would count as a "no" vote.
Well, of the returned ballots, 18 were no and 15 were yes. The board made a motion to disregard the vote; there was a second vote; and the satellite dish was approved!
We homeowners voiced our opinion and asked how they could just disregard our vote, which was their idea in the first place, and got the most stupid answer I ever heard in my life: "Well, it was only a difference of a few votes, anyway."
Can a board just toss aside a legitimate vote because they don’t like the answer? They are going to have another meeting soon, and I would like to be able to give my opinion and know it’s correct. –Irene
DEAR IRENE: I love that answer. Perhaps we should use it in political elections: "Hey, I got five less votes than my opponent so I am the real winner."
Seriously, the answer to your question depends on your legal documents. Some actions of a community association must be approved by a majority of the owners — for example, spending over X dollars for improvements. Other actions can be taken by the board pursuant to the authority given them in the legal documents.
If the board has the authority to install the dish — and merely wanted to run it by the owners — they can ignore the clear wishes of the owners. However, they run the risk that they will not be voted back in office at the next annual meeting or even recalled before that time.
On the other hand, if this decision must be approved by a majority of owners, then the board cannot ignore the negative vote. In that event, you could complain, and consider whether to retain legal counsel to challenge the board’s action.