DEAR BOB: I’ve read several articles you wrote in 2001 and 2002 about the Internal Revenue Code 121 $250,000 principal residence sale tax exemption (up to $500,000 for a married couple filing jointly). Is that tax law still in effect? My husband and I spend six months each year in our Florida home and six months annually in our other home, which we recently sold. We filed a Florida homestead to save on property taxes. Our accountant said that because tax-law changes occur all the time, we should check to see if we qualify for the IRC 121 tax exemption. Since we meet the “aggregate” two-out-of-last-five-years ownership and occupancy tests for the home we sold, do we qualify for the $500,000 exemption? – Joan H.
DEAR JOAN: I am shocked your accountant didn’t know the answer to your first question. Internal Revenue Code 121, enacted by Congress in 1997, is alive and well. There are no proposed plans in Congress to change it. In fact, the IRS recently announced new regulations clarifying exceptions for home sellers who only partially meet the two out of last five years principal residence ownership and occupancy tests.
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Because you occupied your home sold at least six months each year, that is “aggregate” occupancy time of 30 months in the last five years, so you meet the two-year time test.
However, if I were an IRS auditor, I would inquire if that home sold was really your principal residence (as required by IRC 121) or if it was a secondary home. The fact you filed a Florida homestead indicates Florida is your principal residence.
Other indications of your principal residence include where you vote, your bank account location, where you are employed, your driver’s license address, and your car registration location. Also, did you file income taxes in the state where you sold your home?
So far, we only have one court decision interpreting IRC 121. It is Guinan v. U.S., 2003-1 USTC 50475. In that case, the taxpayers sold their Wisconsin home and paid capital gain tax. Then they sued the IRS for a tax refund. The IRS fought hard. The U.S. District Court ruled the Wisconsin home was not the taxpayer’s principal residence, primarily because they didn’t file their income taxes there.
CONDO OWNER WAS ABLE TO GET F.H.A. REVERSE MORTGAGE
DEAR BOB: Thanks for your recent item about getting a reverse mortgage in a condo complex where there is a high percentage of renters. I had the same problem. Our condo complex has no rules against renters, and more than 40 percent of the condos are now rented. The result is sellers have a tough time selling because mortgage lenders either won’t make a loan to the buyer or the interest rate is very high. However, I am 68 and like my condo where I plan to stay until they permanently carry me out feet first. But I also had trouble getting a reverse mortgage. Then I met a reverse mortgage specialist who got me a FHA reverse mortgage. You might suggest that reverse mortgage borrowers try FHA if they have difficulty getting a reverse mortgage – Ethel W.
DEAR ETHEL: Thank you for sharing that valuable information.
HOW LONG MUST SELLER WAIT TO DECLARE BUYER IN DEFAULT?
DEAR BOB: The sale of my home was supposed to close on June 29. But it still hasn’t closed because the buyer is having difficulty clearing up his credit report so he can get a mortgage. His mortgage broker says the problem is almost resolved. But I’ve been hearing that almost since the sales contract was signed on May 28. How long do I have to wait to declare my buyer in default so I can sell to the “back-up buyer” who has been patiently waiting? My Realtor advises to act now – Rolf R.
DEAR ROLF: You have a smart Realtor. Most real estate lawyers would advise you to wait “a reasonable time” after the scheduled closing date before declaring your first buyer in default and refunding his earnest money deposit.
Especially since you have a waiting back-up buyer, in my opinion you have waited far longer than a reasonable time.
If you are certain your back-up buyer is ready to quickly close the sale, I wouldn’t wait any longer to refund the first buyer’s money and cancel that sale for breach of contract. For more details, please consult a local real estate attorney.
EXCLUSIVE AGENCY LISTING SOLVED HOME SELLER’S PROBLEM
DEAR BOB: I was one of those foolish “do-it-yourself” home sellers you often write about who thought he could save the 6 percent sales commission. On my home, that’s about $21,000. But I soon learned how much work is involved in selling alone. Of course, several realty agents hounded me to list with them. But I resisted. Then one persistent, but very astute, agent suggested an “exclusive agency” listing. I could still try to sell my home on my own without any commission, but after I signed the 90-day exclusive agency listing at 6 percent sales commission, she put my listing into the local MLS (multiple listing service) and on the Internet. She told me most realty agents don’t take exclusive agency listings but she loves them and has never had a seller find a buyer on their own. The happy result for me was I sold my home and netted more than if I had sold without an agent. Why don’t you write about exclusive agency listings? – Brent C.
DEAR BRENT: Shame on me. The reason I rarely mention exclusive agency listings is because most real estate agents refuse to accept them. You obviously had a very savvy agent who had confidence she could find a buyer, using the MLS and the Internet, to find a buyer before you did. She was right.
STATED-INCOME MORTGAGE WORKS FOR SELF-EMPLOYED BUYER
DEAR BOB: I just thought you should know about a new type of home loan called a “stated-income mortgage” for home buyers. As a self-employed manufacturer’s representative for several companies, my income varies wildly from year to year and even month to month. But my FICO score is 724 so you know my credit is good. My wife is expecting our first child so I knew I had to do something to get us out of our apartment. The Realtor who showed us houses told us about stated-income mortgages. Although we paid one-eighth percent higher interest than if I had a “wage slave job,” we had no trouble getting a mortgage and buying our first home, even with only a 10 percent down payment. Why don’t you write about stated-income mortgages? – James L.
DEAR JAMES: Virtually every mortgage lender has offered stated-income or “low doc” (meaning low documentation) home loans to borrowers with good credit for many years. You are correct I shouldn’t presume everyone knows about these great mortgages which are only slightly more expensive that full-documentation home loans.
RAISE HOMEOWNER INSURANCE DEDUCTIBLE TO SAVE “BIG BUCKS.”
DEAR BOB: Thank you for advising homeowners to raise their insurance deductibles to save “big bucks.” After my neighbor told me his homeowner’s insurer “non-renewed” because he had three claims last year (total about $5,600), when I got my huge homeowner’s insurance bill last month I consulted my insurance agent about it. She said, although I haven’t had any claims, my low $250 deductible causes my home insurance premiums to be very high. She suggested raising my deductible as high as we can afford. To help us decide, she gave us the premiums at $500, $1,000, $1,500 and $2,000 deductibles. Since we always have well over $2,000 in savings, my wife and I selected the $2,000 deductible. As a result, we will have to pay any small losses but we saved about $340 on our annual premium. Thanks for that profitable advice – Sam H.
DEAR SAM: You’re welcome. And thank you for letting us know homeowners can raise their deductibles up to $2,000, thus saving money and minimizing their possibility of non-renewal for filing too many claims. When my homeowner’s insurance comes up for renewal in a few months, I’ll do as you did and raise my deductible to $2,000.
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