DEAR BOB: Please help us. We are in declining health and are no longer able to use our vacation home, which we have enjoyed for more than 20 years. But upon consulting our tax adviser, she says we will owe capital gain tax on the approximate $200,000 profit if we sell it. How can we avoid tax? Until the last two or three years, we spent four or five months each year living in our vacation home – Burton S.
DEAR BURTON: Sorry. Your tax adviser is correct. Although you clearly meet the ownership test of Internal Revenue Code 121, to claim the exemption up to $500,000, you don’t meet the occupancy test of at least 24 months during the five years before the sale of your vacation or second home.
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More important, it appears this secondary residence was not your principal home. Do you have any indications it was your primary residence for at least two of the last five years?
For example, did you vote there? Did you file income tax returns there? Do you have local affiliations, including your bank account, auto registration and driver’s licenses? If I were an IRS auditor, I would rule this second home is not your principal residence and you are not entitled to any tax break when you sell it.
NO TAX DEDUCTIONS IF YOU DIDN’T PAY THE EXPENSES
DEAR BOB: I am on title with my mother, as joint tenant with right of survivorship, to her free-and-clear home. However, she doesn’t have enough income to file tax returns. But I can sure use all the tax deductions I can find. Can I deduct her property taxes, which were an outrageous $2,400 in 2003? – Wayne W.
DEAR WAYNE: As a co-owner, can you prove you actually paid the approximate $2,400 property tax bill? Unless you have a cancelled check, or other evidence you actually paid the property taxes, you are not entitled to claim that income tax deduction. Ask your tax adviser to explain further.
MUST HOME BUYER HONOR TENANT’S LEASE?
DEAR BOB: We recently bought our first home. The house was occupied by tenants who said they would move out when the house was sold. However, after the sale closing, when we went to the house to discuss the move-out date with the tenants, they showed us their lease which runs until January 2005. How can we get these tenants out of our house? – Jean-Michel S.
DEAR JEAN-MICHEL: You can’t. As the proud new owner of the house, you must honor your tenant’s lease until January 2005. The tenant is entitled to remain in the property on the terms of their lease.
However, you might wish to buy out your tenant. Money often talks. Offering your tenant cash to move out now might work. But be sure to get any move-out agreement in writing so there is no misunderstanding about the move-out date and terms.
Of course, don’t pay the tenant any money until the tenant has moved out and you have thoroughly inspected the home to be certain there is no damage to be deducted from the tenant’s security deposit. For more details, please consult a local real estate attorney.
The new Robert Bruss special report, “Secrets of Tax-Free Reverse Mortgage Income for Senor 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 download at www.bobbruss.com. Questions for this column are welcome at either address.
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