DEAR BOB: I currently own a rental condo. If I move into it for 24 months, I believe I will not be liable for any capital gains tax. But I would like to sell the rental condo and purchase another rental property using the Internal Revenue Code 1031 tax-deferred exchange you often discuss. How long would I have to rent the condo I purchase before I can convert it into my personal residence? – Richard W.
DEAR RICHARD: If I understand your e-mail correctly, instead of moving into your rental condo to convert it into your principal residence after 24 months of occupancy, to claim up to $250,000 tax-free sale profits under Internal Revenue Code 121, you instead want to make an IRC 1031 tax-deferred trade for your ultimate dream condo.
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That’s feasible. To make a qualified tax-deferred trade, presumably a Starker IRC 1031(a)(3) exchange, you must meet the requirements. These include having the sales proceeds for your old condo held by a qualified third-party intermediary accommodator, designating the replacement property within 45 days, and completing the acquisition within 180 days.
The property you acquire in a tax-deferred trade must be held as a rental at the time of acquisition. There is no exact answer to how long it must be rented before you can convert it into your personal residence. To show rental intent at the time of acquisition, most tax advisers suggest at least 6 to 12 months. For more details, please consult your tax adviser.
SPECIAL HOME-SALE RULE APPLIES TO MILITARY TRANSFERS
DEAR BOB: In 2002, my husband and I purchased a home in Virginia. A year after moving in, we were forced to relocate to Alabama due to his active duty with the military. We rented the Virginia home, thinking we might be reassigned to that area within a few years. But we are now in Nebraska on yet another military assignment with no hope of returning to Virginia. As a result, we want to sell the Virginia home. Since we lived in it for a year within the last five years, and were forced to move by military assignment, do we qualify for a reduced profit-tax exclusion under Internal Revenue Code 121 for the principal-residence sales exclusion? – Juliett F.
DEAR JULIETT: I presume you will have a substantial profit if you sell the Virginia home. As you probably know, the 2003 Military Family Tax Relief Act created a special exception to the two-out-of-five-year occupancy rule for uniformed and foreign service personnel on active duty.
These homeowners can now ignore the five-year period by not reporting their gain from the sale of their former principal residence if they owned and occupied it at least two of the 10 years before its sale.
But that is not your situation since you only lived in your home one year before being transferred. Therefore, you appear to qualify for the “change of employment location” exception to Internal Revenue Code 121.
Because you lived in your principal residence just 12 months during the 60 months before its sale, you appear to qualify for a 50 percent exemption up to half of the $500,000 exemption for a married couple filing jointly. For full details, please consult your tax adviser.
REVERSE MORTGAGE UNAVAILABLE IF ALL OWNERS ARE NOT 62
DEAR BOB: A few years ago, my elderly parents (now ages 72 and 69) wanted to buy a retirement house in a gated community. Although they have substantial investments, they didn’t have enough income to qualify for a mortgage with their 25 percent down payment. So I agreed to co-sign. But the mortgage company insisted I be on the title to the home. My parents have made all the monthly payments with no problem. But last Christmas when I spent the holidays with them, they confided they are running short of income. Fortunately, their house has greatly appreciated in market value and is now worth at least $550,000. But when they investigated getting a reverse mortgage, they learned it must be recorded as a first mortgage. They could sell some of their stocks to pay off the current mortgage. However, I would then suggest signing a quit claim deed to them so they can get a reverse mortgage. Is this a good idea? – Gregg H.
DEAR GREGG: I see no reason why you should not quit claim your interest in your parents’ home so they can obtain a reverse mortgage to increase their retirement income. You helped them obtain a mortgage, but now that role is over.
A reverse mortgage cannot be obtained unless all homeowners are 62 or older. Because you are presumably younger than that age, now it’s up for you to help your parents obtain a reverse mortgage so they will have enough income to enjoy their retirement. I know it’s shocking, but you are no longer needed on the title.
The new Robert Bruss special report, “2005 Realty Tax Tips: 8 Chapters of Tax Savings for Homeowners and Investors,” 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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