DEAR BOB: My husband and I have owned and lived in our home almost 11 years. We owe about $199,000 on the mortgage. But our neighborhood has skyrocketed in market values. If we sell our home, we can walk away with about $700,000 in profit. We would like to move to a cheaper area. If we buy another house for $400,000 for cash, must we pay capital gains tax on our sale profit? We would like to get a small mortgage on our next home for the tax breaks. But neither of us is employed. Can we get a mortgage and what should we do with the extra cash? – Kris A.
DEAR KRIS: You have lots of nice problems. First, let me presume you owned and occupied your principal residence at least two of the five years before its sale. That means you qualify for the Internal Revenue Code 121 home-sale tax exemption up to $500,000 for a married couple filing jointly (up to $250,000 for a single home seller).
Purchase Bob Bruss reports online.
Your mortgage balance is irrelevant. What matters is your $500,000 exemption on the difference between your adjusted sales price (gross sales price minus selling expenses) and your adjusted cost basis (purchase price plus capital improvements added during ownership). I presume that is $700,000.
The result is about $200,000 of your capital gain will be taxable. Sorry.
The purchase price of your next home is irrelevant. To obtain a mortgage on it, since you are both unemployed, I suggest you consult an experienced mortgage broker. He or she can probably arrange a “no doc” mortgage if you have a FICO (Fair, Isaac and Co.) credit score of at least 700. But you won’t get the lowest interest rate.
DON’T ASK FOR ADVANCE I.R.S. RULINGS
DEAR BOB: How can I avoid having a lease-option being characterized as a land contract sale? Can I submit the lease-option to the IRS and receive a favorable advance ruling? I want to offer lease-options to my tenants but am terrified of the consequences if it should be determined to be a land contract sale? – Scott W.
DEAR SCOTT: Stop worrying. Unless your lease-option is a disguised property sale, you have nothing to fear. I am unaware of any tax court decision reclassifying a lease-option as a land contract sale.
I suggest you study my special report, “How to Profitably Use a Lease-Option to Buy or Sell Your Home or Investment Property,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
WHY BOTHER WITH LITTLE $11,000 ANNUAL PROPERTY GIFTS?
DEAR BOB: My wife and I bought a $132,000 triplex 25 years ago. Today it is assessed at $880,000. To minimize future inheritance taxes, we want to transfer ownership to our two children with a series of tax-exempt $11,000 annual gifts and quit claim deeds. If we each gift $11,000 to our son and daughter ($22,000 total each year), will it take us three years (three times $44,000) or 20 years (20 times $44,000) to transfer ownership to our children? – Gerard P.
DEAR GERARD: It will take you 20 years at $11,000 each to transfer $880,000 of market value to your children. Why bother?
When you or your wife dies, presumably your will or living trust leaves the property to your surviving spouse. That is a 100 percent tax-free event.
If the surviving spouse dies in 2004 or 2005, up to $1,500,000 of assets will transfer free of estate tax. Unless you have a large estate, your plan seems like a futile effort. For more details, please consult a local estate-planning attorney.
The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Seller 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. 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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