Tax laws on home sale confuse homeowner

DEAR BOB: In 1999 I bought a house in Florida as a single woman. That same year, I married and moved to Washington, D.C. My daughter lived in the home and cared for it. I sold the home in 2003 at a profit. Can I take advantage of that $250,000 tax exemption you often discuss? I believe I should qualify due to the “unforeseen circumstances” clause and also “change of employment” of my spouse, so I don’t have to meet the two-year residency requirement – Diane F.

DEAR DIANE: Nice try. Sorry, you don’t appear to qualify for the Internal Revenue Code 121 principal residence sale $250,000 tax exemption. You only occupied the house a few months before moving out.

Purchase Bob Bruss reports online.

Your marriage doesn’t qualify as an “unforeseen circumstance.” Neither does your spouse’s change of employment location since he wasn’t on the title nor was he a resident of the house. Also, your daughter’s occupancy of the house doesn’t qualify because she was not on the title.

If you moved due to a change in your job location, you could qualify for a partial exemption. Suppose you lived in the house six months before moving out. Then you might have qualified for up to a 25 percent tax exemption because you lived in the house one-fourth of the required 24-month minimum occupancy during the five years before the sale.

However, because you waited three or four years after moving out to sell the house, it appears you do not qualify for even a partial exemption due to your change of employment location.

But the good news is your capital gain is subject to a maximum federal low 15 percent capital gains tax rate if you sold after May 6, 2003. If you deducted depreciation while your daughter rented the house from you, recaptured depreciation is taxed at a special 25 percent federal tax rate. For full details, please consult your tax adviser.

DOES LEASE-OPTION HOME TENANT HAVE EQUITY IN THE HOME?

DEAR BOB: I read your recent comments on lease-options. Is it true a lease-option buyer-tenant has an equitable interest in the home when part of the rent is used for the down payment? – Robert W.

DEAR ROBERT: With a lease-option, part of the rent paid by the tenant is usually credited toward the option purchase price if (and when) the tenant elects to exercise the option to buy the property.

Until that happens, the lease-option tenant does not have an equitable interest in the property. For more details, please consult a local real estate attorney or tax adviser.

NO SPECIAL REALTY BENEFIT FOR CARE GIVERS

DEAR BOB: My husband I live in my grandfather’s house and care for him. His will leaves his free-and-clear house to my mother and aunt. There is no living trust. My cousin is executor of his will. When my grandfather dies, can we stay in the house while it is in probate? Since we have given up our lives to care for grandfather, I don’t think my mother and aunt will have any problem with that. By law, if we cannot stay, can we bill the proceeds from the house sale for the care we have given grandfather? – Roxanne W.

DEAR ROXANNE: I am not aware of any state law that would allow you and your husband to remain in your grandfather’s house after he dies while his estate is in probate.

Hopefully, your mother and aunt will allow you to do so. Neither am I aware of any statute that entitles you to bill your grandfather’s estate for the care you have given him. Your free housing is your compensation. For more details, please consult a local probate attorney.

The new Robert Bruss special report, “Secrets of Tax-Free Reverse Mortgage Income for Senior Citizen Homeowners,” is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.