DEAR BOB: I bought my home for about $250,000 and can now sell it for $600,000. After the tax-free $250,000 principal residence sale tax exemption, I will have exposure to about $100,000 taxable capital gains. What is the current percentage tax rate on capital gains? Can it be offset by the capital improvements I added? Also, should I ask my buyer to pay the sales commission to lower my asking price and reduce my capital gains? – Morgan G.

DEAR MORGAN: The federal capital gains tax rate is currently 15 percent maximum. In addition, don’t forget any applicable state tax.

Purchase Bob Bruss reports online.

You should add the cost of capital improvements you made to your purchase price.

To illustrate, if you paid $250,000 for the house, and you made $50,000 of capital improvements, your adjusted cost basis is therefore $300,000.

If you ask your buyer to pay the sales commission, you will be at a severe disadvantage compared to other home-sale listings. The sales commission you pay is a subtraction from your gross sales price, thus reducing your capital gain.

For example, if your home’s sale price is $600,000 and you pay a 6 percent sales commission of $36,000, your adjusted sales price is only $564,000. For full details, please consult your tax adviser.


DEAR BOB: My husband and I expect to keep our home five to eight years before moving up to a larger home. We have an opportunity to refinance at 4.5 percent fixed interest for 10 years. But the problem is this is an interest-only mortgage. The payment is lower than for a fully amortized mortgage. But we won’t be building any equity. Should we take this interest-only mortgage? – Bonnie H.

DEAR BONNIE: Interest-only mortgages can be a very good deal for homeowners who plan to stay in their homes just a few years. But you should be aware you won’t be building any equity because an interest-only mortgage doesn’t amortize the mortgage.

I like interest-only mortgages because all of the monthly payment is tax-deductible itemized interest.

However, if you expect to stay in your home five to eight years, I suggest refinancing with an adjustable-rate mortgage with a fixed interest rate for the first five, seven, or even 10 years.


DEAR BOB: Can I sell my two rental properties and buy another of a higher value by using a Starker exchange? – Frank V.

DEAR FRANK: Yes. You can sell your two rental properties and defer the capital gain tax by making in Internal Revenue Code 1031(a)(3) tax-deferred Starker exchange for one larger property held for investment or for use in a trade or business.

Please be aware that to defer tax on the sale of rental properties, you must trade equal or up (total) in both equity and market value without taking out any taxable “boot” such as cash or net mortgage relief. You must also meet the strict 45-day and 180-day deadlines for the replacement property. For full details, please consult your tax adviser.

The Robert Bruss special report, “How to Exchange Your Way to Tax-Deferred Wealth,” is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 r by credit card at 1-800-736-1736 or instant Internet PDF download at Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center


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