DEAR BOB: Since my divorce about 16 years ago, I’ve lived in my home alone. During that time, my home has greatly appreciated in market value. If I sell it today, my capital gain will be around $400,000. But, as a single person, I would only be entitled to a $250,000 tax exemption and would have to pay capital gain tax on about $150,000. For the last few months, my “significant other” has been living with me. If we get married, will I then become entitled to the $500,000 home-sale tax exemption for a married couple? – Edward F.
DEAR EDWARD: No. But you certainly have a creative tax mind. Internal Revenue Code 121 provides a principal residence sale tax exemption up to $250,000 for each qualified home seller. To qualify, you must have owned and occupied your principal residence an “aggregate” two of the five years before its sale.
Purchase Bob Bruss reports online.
For a husband and wife, only one spouse’s name need be on the title. However, to qualify for up to $500,000 of principal residence sale tax-free profits, both spouses must meet the two-out-of-last-five-year occupancy test and they must file a joint income tax return in the year of the sale.
Marriage won’t instantly add $250,000 more to your existing $250,000 principal-residence sale tax exemption entitlement. However, after your new wife has occupied your home as her principal residence at least 24 months, then you both can claim up to $500,000 tax-free home-sale profits if you file a joint tax return in the year of the sale.
More details are in my new special report, “Everything Homeowners Need to Know About the $250,000 and $500,000 Home Sale Tax Exemption,” 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.
BUYING A HOME SHOULD COME BEFORE BUYING VACANT LOTS
DEAR BOB: I am interested in buying a few vacant lots as investments. But I do not have enough cash to purchase them straight out and I do not own my home to take the money on a home equity credit line. I went to the bank to ask about a line of credit. They told me I have to apply for a credit card. Is there any other way to come up with the money? – Eric N.
DEAR ERIC: Vacant land is the riskiest real estate investment. I suggest you first buy a house or condo for your personal residence. If you have good credit and a job, even if you don’t have much cash for a down payment, you should be able to qualify for a home loan at today’s low interest rates.
Most banks prefer to make small loans in the form of cash advances on credit cards. Unfortunately, the interest rate is usually very high.
You can ask the bank loan officer about an unsecured line of credit at a lower interest rate than a credit card cash advance. But, unless you have an established bank relationship, and unless you qualify for a substantial amount, most banks don’t want to mess with the paperwork for small, unsecured credit lines.
I suggest you avoid going to a finance company because their interest rates are usually very high for unsecured loans.
Get your priorities straight. Buy a home first because it is more likely to be a far more profitable investment than vacant lots.
STEPPED-UP REALTY BASIS APPLIES TO INHERITANCE, NOT DIVORCE
DEAR BOB: My longtime friend sold her house of 17 years. Nine years ago, her ex-husband signed his share of the house over to her in the divorce. Isn’t she entitled to a stepped-up basis on his half of the house for the otherwise hefty capital gains tax her accountant says she has to pay? – Nancy R.
DEAR NANCY: No. Stepped-up basis tax rules apply to inherited assets, such as real estate, stocks and bonds. When such property is inherited, the heir receives those assets at their market value on the date of death (or alternate date used by the deceased’s estate).
For this reason, individuals who inherit real estate and sell it shortly after receiving title usually owe little or no capital gains tax. However, if they received the same asset as a gift before the decedent’s death, they usually will owe a big capital gains tax because a donee takes over the donee’s usually low basis.
Getting back to your friend, when she received her ex-husband’s half of the house title, there was no tax due at that time. The reason is intra-spouse marital transfers, including divorce, are tax exempt.
But she took over her ex-husband’s low adjusted cost basis, equal to her basis for the other half of the house. The result is all her capital gain is taxable, except for her $250,000 exemption. For full details, she should consult her tax adviser.
UNPAID VALID MORTGAGE APPLIES TO SUBSEQUENT OWNER
DEAR BOB: My late grandmother gave me a quit claim deed to a property. It has a mortgage, which she signed and recorded in June 2001. Does the lending institution still have a valid mortgage against my property since I am now the legal owner? If I am responsible for the mortgage, please explain why? – Mr. A.J.
DEAR MR. A.J.: A recorded mortgage or deed of trust makes the property the security for repayment of the loan obligation. Even if the property owner transfers title, that property remains the primary security for the debt until it is fully paid.
I’m not certain what you’re trying to do, but it won’t work.
Although your late grandmother deeded her property to you, that title conveyance was “subject to” all liens and encumbrances recorded against that title.
If you don’t make the payments on that secured debt, the lender can foreclose on your property. For more details, please consult a local real estate attorney.
DON’T LET BUYER MOVE INTO HOME BEFORE TITLE TRANSFER
DEAR BOB: I am selling my home in a small town where the realty market is very slow. The buyer is getting an FHA mortgage. But the paperwork seems endless. As I’ve moved out and the house is vacant, the buyer wants to move in and pay me rent until the title transfers in about 30 days. The realty agent says this is a good idea to keep the house from sitting vacant. What do you advise? – Ryan H.
DEAR RYAN: If your buyer’s FHA mortgage is taking a long time, there might be a good reason. Maybe he has problems qualifying for the mortgage.
Don’t let your buyer move into the home before title transfer, even if you have a signed rental agreement. After the buyer moves in, he controls you and is likely to find real or imagined home defects which he will demand you fix before he signs the closing papers.
It’s better to have a vacant house than to have one occupied by a buyer who can’t get their FHA mortgage successfully closed. The realty agent gave you bad advice.
DO-IT-YOURSELF HOME SELLER THINKS HE WAS SUCCESSFUL
DEAR BOB: I strongly disagree with your frequent advice for home sellers to hire a professional real estate agent. After my mother died about six months ago, and I received the title to her house as surviving joint tenant, I interviewed four local real estate agents about listing it for sale. They gave me their opinions of market value. But all insisted on 6 percent sales commissions and refused to negotiate. So I decided to try selling it myself. It took me three weeks of advertising and holding weekend open houses. Eventually, a buyer’s realty agent brought a buyer who offered me practically full price. All I had to pay was a 3 percent buyer’s agent commission – Sam W.
DEAR SAM: Most communities have real estate agents who will negotiate on the sales commission rate or charge a flat service fee, especially if the home seller doesn’t need full service, such as by holding weekend open houses.
If the home you sold is in a lower price range, I don’t blame those agents for insisting on a full sales commission because of the low amount involved.
Real estate sales commissions are usually split 50-50 between the listing agent and the selling agent. But you missed out on the benefits of the MLS (multiple listing service) and a listing agent’s Internet marketing at www.realtor.com. If your home had wider market exposure, you might have received a higher sales price.
Although you think you sold your home alone without a professional agent, all you saved was 3 percent of the sales price. In return, you spent many hours, plus advertising costs, possibly receiving a lower net sales price than if you had a listing agent looking out for your best interests.
Luckily, your buyer was represented by a buyer’s agent who hopefully made certain you complied with all the disclosure laws.
The new Robert Bruss special report, “Everything Homeowners Need to Know About the $250,000 and $500,000 Principal Residence Sale Tax Exemption,” 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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