DEAR BOB: My fiancé and I live in her condo, which she bought in January 2003. We just signed a contract to buy a house together. It should be finished in September. She will probably earn about $70,000 capital gain on her condo when it is sold. Since she has owned it less than two years, will there be any capital gains tax to pay? – Anthony M.
DEAR ANTHONY: Internal Revenue Code 121 allows principal residence sellers up to $250,000 tax-free sales profits (up to $500,000 for a married couple filing jointly). Because you are not married to the condo owner, and you are not on the condo title, only she can only qualify for the basic $250,000 exemption.
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However, she has not owned and occupied the principal residence condo the required “aggregate” two of the last five years before its sale. But she might be eligible for a partial exemption, based on the circumstances and the number of months of ownership and occupancy.
To qualify for a partial principal residence sale tax exemption, there are several possibilities. If your fiancé condo owner changed job locations that qualify for the moving expense tax deduction, she could be eligible. To qualify, she must have a new job site that is at least 50 miles further from the condo than was her old job site.
Other principal residence sale partial exemptions include moves due to health reasons and “unforeseen circumstances,” such as unemployment, multiple births from the same pregnancy, and death in the immediate family. But those circumstances don’t seem to apply in your situation.
Therefore, it appears your future wife’s condo sale does not qualify for any of the Internal Revenue Code 121 partial exemptions and she will owe the full capital gains tax on her non-exempt profit. However, be thankful the maximum federal capital gain tax is now just 15 percent. For full details, please consult your tax adviser.
ALWAYS GET HOME-PURCHASE PROMISES IN WRITING
DEAR BOB: What are our legal rights? We were told that the gravel road to our new house would be paved within one year. Two years later, our road is still unpaved. Each of the nine home buyers on the same road was told something different. Some people have it in writing, others do not – Gail M.
DEAR GAIL: In real estate, verbal promises are worthless. The reason is the Statute of Frauds requires real estate agreements to be in writing to be legally enforceable.
Unless you have the developer’s written statement that the road will be paved by a specific date, you don’t have an enforceable contract. But don’t give up hope.
If some of your neighbors on the same road have written contracts stating the road would be paved, perhaps you could all join in a class action lawsuit against the developer for failure to pave the road. For full details, please consult a local real estate attorney.
PITFALLS OF SALES-COMMISSION CUTTING
DEAR BOB: My husband and I are getting ready to sell our home. How should we negotiate the Realtor’s listing commission? – Kirsten Y.
DEAR KIRSTEN: If you read my articles regularly, you know I recommend interviewing at least three successful realty agents who sell homes in your vicinity. Listen to their listing presentations, study each agent’s CMA (comparative market analysis) forms, phone their client references, and then decide which listing agent is best for you.
But it is usually best not to negotiate the listing agent’s sales commission below the “going rate” in your area. The reason when your listing appears in the local MLS (Multiple Listing Service), if it shows a lower-than-normal sales commission to the buyer’s agent, other agents might not even show your home to their prospective buyers.
For example, suppose 6 percent is the customary local sales commission. But you find a realty agent who will accept a 5 percent sales commission. That means, instead of receiving the customary 3 percent commission split, the buyer’s selling agent will receive only 2.5 percent. That might not seem like a big difference. But when a buyer’s agent can show your house or another one offering a full sales commission, your house will be shown to the buyers only as a last resort.
However, if your listing agent brings in a low-ball purchase offer substantially below the recommended asking price for your home, that’s the time to talk with your listing agent about a commission adjustment.
IF YOUR NAME IS NOT ON HOME DEED, YOU’RE IN A BAD SITUATION
DEAR BOB: When I moved in with my lover almost 10 years ago, he owned his nice house. I have lived with him ever since. Now we want to sell. Home prices in the area have appreciated astronomically. According to the Realtor who will probably get our listing, we will net about $350,000 profit. I’ve been reading your excellent articles for years. Because I am not on the title to the house, although I have been living in it many years as my home, can we each qualify for that $250,000 tax exemption you often discuss? Also, if we decide not to sell, if something happens to my lover (he has a dangerous job as a high-rise steelworker), will I inherit the house? – Sharon R.
DEAR SHARON: Because your name is not on the title to your lover’s home, and since you are not married to him, he is entitled to only the basic $250,000 principal residence sale tax exemption of Internal Revenue Code 121. That’s presuming he owned and occupied the principal residence at least two of the five years before its sale.
Because you are not married to the homeowner, there is no way IRC 121 would grant you an additional $250,000 tax exemption although you occupied the home more than two of the last five years.
As for your inheritance question, the answer depends on your lover’s written will. If he has none, the state law of intestate succession applies and, as a non-relative, you are not entitled to inherit his assets. For full details, please consult a local attorney.
WHAT IF MORTGAGE LENDER DEDUCTED PENALTY FROM ESCROW?
DEAR BOB: We have an FHA mortgage which requires an escrow account for the property taxes and fire insurance payments. Last year, our mortgage lender failed to pay the property tax on time. When I received a delinquent notice from the local tax collector, I immediately phoned our lender. The clerk called me back and admitted the payment deadline was missed. She promised the property tax would be immediately paid from our escrow account. It was paid. However, our mortgage lender also deducted the late payment fee of $256. Is this legal to deduct the late payment fee from our escrow account when the lender missed the payment deadline? – Dirk H.
DEAR DIRK: No. Someday, I should compile all the mortgage lender horror stories about their gross abuses of home mortgage escrow impound accounts. You would be shocked at the mortgage lender abuses of escrow accounts like yours.
Unfortunately, you have a FHA mortgage, which requires an escrow account for payment of the property taxes and insurance. There’s nothing you can do about that (except refinance with another lender who doesn’t require an escrow account).
At this point, you must politely phone your mortgage loan servicer and ask that your escrow account be credited with the $256 late fee, which was not your fault. If that doesn’t happen within 30 days, follow up with a written demand. Beyond 30 days, your best recourse is to sue your mortgage lender in local Small Claims Court for the $256. Also, report the matter to FHA (HUD) in Washington, D.C., but don’t expect action against your dishonest mortgage lender.
WHY OWNER’S TITLE INSURANCE POLICY IS SO IMPORTANT
DEAR BOB: About two years ago, my late uncle gave me his vacation home. He was dying of cancer. I gratefully accepted his generous gift. His attorney prepared a simple quit claim deed, which I recorded. My uncle died about three months later. However, since then I have been hounded by his creditors, including the IRS, which had apparently recorded a tax lien before I received the quit claim deed. The IRS claims I owe the Feds more than the vacation home is worth. Can they make me pay? – Roth W.
DEAR ROTH: No. But the IRS can seize the property under its tax lien, which was recorded (to give constructive notice) before you obtained title.
Your situation shows why every person who acquires title to any property should always obtain an owner’s title insurance policy at the time of acquisition. If you had known of the recorded liens against your uncle and his real estate, you probably would have refused to accept his quit claim deed. For more details, please consult a local real estate 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.
Real Estate Center).