DEAR BOB: I bought my home for $20,000 in 1965. Amazing, huh? I am told by a real estate agent it is worth $600,000 today. He said I can deduct my $20,000 cost, plus a single-owner home sale, $250,000 tax exemption. But can I avoid tax on my remaining $330,000 profit by using the sales proceeds to buy a replacement home? – Kat C.
DEAR KAT: No. Your real estate agent is correct that you can subtract your $20,000 cost basis (plus the cost of any capital improvements you added during ownership) and your $250,000 principal residence sale tax exemption from the sales price to arrive at your $330,000 taxable capital gain. Also, you can subtract other sales costs, such as the real estate sales commission.
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That result presumes you owned and occupied the home as your principal residence an “aggregate” two of the last five years before its sale, as specified in Internal Revenue Code 121.
Using the sales proceeds to buy a replacement principal residence won’t help you avoid tax on the remaining $330,000 capital gain. But the good news is the maximum federal tax rate on long-term capital gains is now only 15 percent. For more details, please consult your tax adviser.
NO LIABILITY UNLESS BUYER PROVES SELLER KNEW OF DEFECT
DEAR BOB: About two months ago, we bought our first home. Shortly after moving in, we discovered dampness around the bathroom baseboard. My husband tore out the baseboard and discovered a water pipe is leaking. When we contacted the Realtor who sold us the house, she reminded us there was no evidence of the leak when our professional home inspector checked the house. Also, the seller’s disclosure said nothing about the bathroom dampness. To prevent further damage, we had the leaking copper pipe replaced (I thought copper pipe never leaks) and the baseboard restored at a total cost of $1,245. Our homeowner’s insurance doesn’t cover the loss. Do we have any recourse against the home seller? – Marge R.
DEAR MARGE: Probably not. The reason is a home seller is not liable to the buyer for undisclosed defects unless the buyer can prove the seller knew of the defects affecting the market value or desirability of the property and fraudulently failed to disclose them.
If your professional home inspector didn’t discover the “dampness,” it will be extremely difficult for you to prove the seller knew about it but failed to disclose this defect. I suggest you forget the matter.
AFTER TWO YEARS, MARRIAGE WILL SAVE ON HOME-SALE TAX
DEAR BOB: I bought my condo in 2002 when I was single. I recently got engaged. The condo has appreciated in market value about $200,000. After we get married, will our tax-exempt amount remain at $250,000 or will we then qualify for the $500,000? – Daniel M.
DEAR DANIEL: If the condo is the principal residence of you and your new wife, after you each have occupied it as your principal residence at least two of the five years before its sale, you can then claim up to $500,000 total tax-free home-sale profits. This exemption is provided by Internal Revenue Code 121.
You need not add your wife’s name to the title because IRC 121 only requires title be held in one spouse’s name if they file a joint income tax return in the year of home sale. For more details, please consult your tax advisor.
The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Buyer Mistakes,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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