DEAR BOB: We are currently engaged in a major remodel of our home. It is nearing completion. To preserve our sanity and our marriage, my wife and I decided to spend the summer away from the house living in our “weekend place” about 80 miles from my job. Each day, I commuted 160 miles round-trip. But it was worth it. We had a great family summer together and we moved back into our nearly finished home just before the kids started school. We spent about $85,000 on the remodel (borrowed on our home-equity line of credit). When we eventually sell our home, how will this affect our tax situation? – Bill W.
DEAR BILL: Save your home improvement receipts. The total cost is a capital improvement, which should be added to your purchase price adjusted cost basis.
Purchase Bob Bruss reports online.
To illustrate, suppose you paid $200,000 for your home and you spent $85,000 on the remodel. Now your basis is $285,000. If you someday sell the house for, let’s say, $400,000, then your capital gain is the $115,000 difference.
Of course, Internal Revenue Code 121 provides a generous $250,000 principal-residence-sale tax exemption (up to $500,000 for a qualified married couple filing jointly) if you own and occupy the home an “aggregate” two of the five years before its sale. The happy result is all your home-sale profit will probably be tax-free. Your tax adviser has further details.
SHOULD HOMEOWNER USE HOME-EQUITY CREDIT LINE TO PAY OFF CREDIT CARDS?
DEAR BOB: I have foolishly run up about $45,000 in credit card and car loan bills. The interest rates on the credit cards are more than 18 percent. The car loan is at 4.3 percent. I recently took out a $60,000 home-equity credit line offered by my bank. It is at the prime rate, which is 4.25 percent as I write to you. Should I use this credit line to pay off my credit cards and/or the car loan? – Suzanna S.
DEAR SUZANNA: Yes. Pay them both off with your home-equity credit line. The reasons are you will (1) dramatically reduce the interest rate on those credit card loans and (2) also make your non-deductible auto loan interest tax deductible.
However, to eventually pay off that $45,000 total, make more than the minimum “interest only” home-equity loan monthly payment. Home-equity credit lines are wonderful finance “cushions,” such as for situations like yours to consolidate debt.
HOW CAN DAD GET DAUGHTER’S NAME OFF HIS HOUSE TITLE?
DEAR BOB: My adult daughter moved into my house with her son (my grandson) about three years ago after her nasty divorce. She sweet-talked me into putting her name on the title to my house as joint tenants with right of survivorship. Then we had a “falling out” about a year ago. I told her to get out (although I hated to see my wonderful grandson move out, too). They moved out. Now I want to sell my house. But I can’t do so because she is still on the recorded title. When I asked her to sign a quit claim deed my lawyer prepared, she said she would sign only when she gets half of the sales proceeds. My lawyer says there is nothing I can do. Do I have any legal recourse? – Dumb Old Dad.
DEAR DUMB OLD DAD: Now you know why I constantly remind parents not to add their heirs to their real estate titles. A far better alternative would have been to put your home’s title into your living trust, which can be easily changed to disinherit your heirs.
However, you can bring a partition lawsuit against your daughter to force the sale of the joint tenancy property. But then your daughter will be entitled to receive half of the sales proceeds. Sorry, I don’t know any other solution so you can sell your home.
The new Robert Bruss special report, “How to Become a Super-Successful Real Estate Negotiator,” 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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