Home sellers strategize to postpone capital gains taxes

DEAR BOB: Regarding that $250,000 ($500,000 for a married couple filing jointly) home-sale tax break, what about the taxes that would have been due on deferred gains from sales of prior principal residences? My wife and I bought and sold a total of four principal residences over the years, for a total deferred capital gain of about $300,000. Will that amount reduce our $500,000 exemption when we sell our current home? – George F.

DEAR GEORGE: The Internal Revenue Code 121 principal residence sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly) applies to both your deferred capital gains from prior home sales (under now-revoked Internal Revenue Code 1034) and your current home’s capital gain.

Purchase Bob Bruss reports online.

Your $300,000 total deferred capital gains from prior principal residence sales should be subtracted from your current home’s purchase price to arrive at its adjusted cost basis. To this amount, add the cost of any capital improvements made to your current home during ownership to determine its current revised adjusted cost basis.

The difference between your revised adjusted cost basis and your adjusted (net) sales price is your capital gains. When this number approaches $500,000, if you want to fully avoid capital gains tax, it’s time to sell your principal residence.

That presumes you meet the two-out-of-last-five-years ownership and occupancy tests. However, if your capital gains exceed $500,000, why sell unless you have a very good reason for doing so? The new federal capital gains maximum tax rate of only 15 percent is a genuine bargain. For full details, please consult your tax adviser.

IS A DURABLE POWER OF ATTORNEY BETTER THAN A LIVING TRUST?

DEAR BOB: Following your excellent advice, my wife and I have revocable living trusts. All our assets except our home are in the trusts. We hold title to our home in joint tenancy with right of survivorship. We both have durable power of attorney for each other. If something should happen to one of us, will the other spouse be able to sell the house? If we should put the house into a living trust, which of our trusts do we use? If one of us should die, can the surviving spouse transfer the house title into his or her living trust? – Gordon and Susie D.

DEAR GORDON AND SUSIE: If one joint tenant co-owner becomes incapacitated, such as with Alzheimer’s or a serious stroke, it is my understanding some title insurance companies refuse to honor a durable power of attorney because they can’t contact the grantor to be sure he or she is still alive.

As you probably know, when a person dies, his or her power of attorney form they signed automatically terminates.

My opinion is the title to your home and other major assets should be in a joint living trust so if a co-owner becomes incapacitated, as determined by a physician, then the other co-trustee can deal with the living trust assets, such as selling or refinancing if necessary. When one joint tenant dies, the survivor owns the entire property and can transfer its title as desired. For more details, please consult a local probate attorney.

THERE IS NO EASY WAY TO GET RID OF TIMESHARES

DEAR BOB: In 1981, we purchased a timeshare in North Carolina. We want to dispose of this timeshare. But we find selling very difficult, almost impossible. It is now for sale through the management resale office at a price just enough to pay transfer fees. We tried to deed the timeshare back to the management company but they refuse to accept it. Is there a way to deed back the timeshare to get rid of it and not just walk away and harm our credit? – Frances P.

DEAR FRANCES: Unfortunately, there is no easy way to get rid of unwanted timeshares. Most timeshare developers, like yours, won’t accept them back. However, several readers have reported success getting rid of their timeshares at huge discounts at ebay.com. It’s worth a try.

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