DEAR BOB: My mother-in-law has her 20-acre horse farm, home, duplex and barn for sale. She paid $80,000 and will probably sell it for about $450,000. She has made several improvements. There is only a small equity loan. To avoid capital gains tax, can she get a loan to pay off her credit cards so the gain won’t be so large and taxable? She is nearly 65 with no retirement assets other than this farm. What should she do? – Bonita H.?
DEAR BONITA: Congratulations on helping your mother-in-law. Her capital gain will be the difference between her adjusted cost basis, which is usually the purchase price, plus cost of capital improvements added during ownership, minus any depreciation deducted on that rental duplex.
Purchase Bob Bruss reports online.
This adjusted cost basis amount should then be subtracted from her net or adjusted sales price, which is the gross sales price minus selling expenses, such as sales commission and transfer fees. The mortgage balance or other debt secured by the property is irrelevant. Paying off her other debts is also irrelevant.
If she lives on the property, the capital gain profit from the sale of her principal residence and a reasonable amount of surrounding land value is tax-free up to $250,000 or up to $500,000 if she is married filing a joint tax return with her qualified spouse.
To qualify for the Internal Revenue Code 121 tax break, she must have owned and occupied her principal residence an “aggregate” two of the five years before the sale. However, her capital gain profit from the sale of the rental duplex on the property won’t qualify for this great tax exemption.
She should consult a tax adviser now, before the sale closes, to maximize her tax benefits. For tax purposes, this sale will really be of two property sales: the taxable rental duplex and her tax-exempt principal residence with adjoining land.
Good book for new realty investor
DEAR BOB: I am a newbie real estate investor. Is there any type of free grant money or other funding for a beginner investor? Where can I find help getting started? – Alan S.
DEAR ALAN: I am not aware of any truly free money or other down payment funding for a beginner investor. A good book for you to read to get started is “The Weekend Millionaire’s Secrets to Investing in Real Estate” by Mike Summey and Roger Dawson. It is available in stock or by special order at local bookstores, public libraries and Amazon.com.
What profitable improvements should homeowner make?
DEAR BOB: I plan to sell my home in about three years. It was a fixer-upper when I purchased it. Besides needing a new roof, the exterior siding is so old the metal is showing through the white finish. The windows are old and the floors need refinishing. What are my best choices to make profitable repairs to increase the value as I am on a tight budget? – Ann M.
DEAR ANN: Exterior and interior paint is the most profitable improvement you can make. The new roof is an obvious necessity so it should be completed as soon as possible even though it won’t add much value to the home.
Especially profitable improvements include new wall-to-wall carpets or hardwood floor refinishing, new light fixtures and fresh landscaping. Take a critical look at your house through a buyer’s eyes. Ask a real estate agent friend to make suggestions too.
But avoid major renovations, such as a new kitchen or bath, because the cost usually won’t be recovered at the time of home sale.
The new Robert Bruss special report “Secrets of Tax-Free Revere 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 (800) 736-1736 or instant Internet download at BobBruss.com. Questions for this column are welcome at either address.
Real Estate Center).