DEAR BOB: I read your articles religiously every week. If I understand your explanation of Internal Revenue Code 121 correctly, can I buy a house or condo, live in it at least 24 months, fix it up to increase its market value, and then sell it for a tax-free profit up to $250,000? If my understanding is correct, why don’t individuals make a tax-free business out of buying fixer-upper houses, living in them for 24 months, and then selling at a tax-free profit after repairing them? What is the “catch?”– Roth R.
DEAR ROTH: You understand Internal Revenue Code 121 extremely well. There is no “catch.”
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To qualify for this great tax exemption, you must own and occupy your principal residence an “aggregate” two of the five years before its sale. A single homeowner can qualify for up to $250,000 tax-free home sale profits. But a qualified married couple can claim up to $500,000 tax-free sales profits.
Many homeowners have caught on to the great tax benefits of IRC 121. However, the major drawback is you must occupy the principal residence at least 24 months before its sale. For many homeowners, it is a serious obstacle to live in their home while it is being extensively fixed up. For more details, please consult your tax adviser.
HOW UNCLE SAM TAXES DEPRECIAITON DEDUCTIONS
DEAR BOB: Since 1990 I have maintained a home office for my insurance business. Each year on my income tax returns I deduct depreciation for my home office, which is located in my den. If I sell my home, how can I avoid paying tax on my depreciation? – Ben R.
DEAR BEN: In the 1997 Tax Act, Uncle Sam began “recapturing” depreciation deducted after May 6, 1997 at a special 25 percent tax rate. Even when your principal residence capital gain is tax exempt upon sale because it is below $250,000 (or $500,000 for a qualified married couple), Uncle Sam will “recapture” your depreciation deducted and tax it at the 25 percent tax rate. For more details, please consult your tax adviser.
DOES TENANT-IN-COMMON PROPERTY GO TO SURVIVING CO-OWNER?
DEAR BOB: My sister and I invested in a rental house together as tenants in common. During the 14 years we owned it, the market value increased more than $150,000. However, she died a few months ago of leukemia at age 36. She left no will. How do I clear the title into my name? – Brett W.
DEAR BRETT: If your sister died intestate without a will, you won’t automatically inherit her half of that house to which you held title as tenants in common. Had she left a will, her half would have passed according to the terms of that will. However, if you held title as joint tenants with right of survivorship, you would have received title to the house without the necessity of probate.
Since your sister died without a will, the state determines who receives her half of the house. You should consult a local probate attorney to determine if you are your sister’s closest living relative entitled to inherit her property.
Your situation shows why it is so important for everyone to leave a will.
Better yet, holding title in a living trust will avoid probate and make certain your assets go to whomever you wish upon your demise. More details are in my new special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” 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.bobbbruss.com. Questions for this column are welcome at either address.
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