DEAR BOB: I have been an enthusiastic reader for years, but now I am writing for elderly friends who are selling their large house where they lived for 20 years. They want to “downsize” and buy a smaller house. Their CPA advised them they will owe a huge tax even after their $500,000 principal residence sale exemption. But I disagree since they are buying a less expensive home. I’ve enclosed the numbers. Who is right? – Ernst S.
DEAR ERNST: Congratulations on looking out for your elderly friends and for including the details of their home sale. Unfortunately, the CPA is correct and you are mistaken.
Purchase Bob Bruss reports online.
The old “rollover residence replacement rule” of Internal Revenue Code 1034 no longer applies to home sellers buying replacement homes. That tax break was repealed in 1997.
Uncle Sam presumes the $500,000 principal residence sale capital gains exemption for a married couple (up to $250,000 for a single home seller) of Internal Revenue Code 121 is enough. Of course, I am presuming your friends owned and occupied their primary home at least 24 of the last 60 months before its sale to qualify for IRC 121.
Although your friends will owe a huge capital gain tax because of their large capital gain exceeding $500,000, at the current 15 percent federal tax rate plus state tax, they are receiving a big profit on their home sale, out of which they can easily afford to pay the tax..
AT LAST, A COMPLIMENT FOR A REALTOR
DEAR BOB: In 2004, my mother died after a long battle with Parkinson ‘s disease. I inherited her free and clear house. On the advice of mother’s lawyer, I chose Realtor Barb Keleman to sell the house. But first it had to be brought up to current building-code standards. To my great relief, Barb went above the call of duty to help arrange the repairs. She earned every cent of her sales commission, which I cheerfully paid. The sale was all cash with the total approval of my mother’s lawyer. I just thought you should know there are some great Realtors out there – Margaret M.
DEAR MARGARET: In the 31 years I’ve been writing this column, I think yours is the first letter I received complimenting a Realtor for outstanding service. Of course, there are thousands of other excellent Realtors who also deserve praise.
But it is just human nature that I receive mostly letters about real estate problems. Without realty problems, I would be out of business! When I need a Realtor in Canton, Ohio, I will be sure to call Barb Keleman.
HOW TO DETERMINE PAST STEPPED-UP BASIS FOR HOME
DEAR BOB: In 1981, we bought our property, which consists of a house and three rentals, for $200,000. My husband passed away in 1997. Our attorney had the property appraised at that time for $240,000. But I was disappointed, as I thought it was worth more. In 2003, I had a local Realtor evaluate the property and he said it was easily worth $450,000. But I was not ready to sell. In May 2005, a new Realtor wanted to do a “work up” on my property’s value. She came up with a current market value of $850,000. But she couldn’t determine the correct 1997 stepped-up basis value when I inherited the property. Is there any way to do this? – Margaret H.
DEAR MARGARET: Yes. A Realtor can only give you his/her opinion of current market value, usually based on comparable nearby home sales prices, but not past market value.
What you need is a professional appraiser who specializes in determining past market values, such as your property’s market value on the date of your husband’s death in 1997.
The best source for finding these specialist appraisers is on the Internet at www.appraisalinstitute.com. If you have difficulty finding such a local appraiser, give the Appraisal Institute a phone call in Chicago for assistance.
AFTER FIVE YEARS, DEVELOPER WON’T GIVE UP CONDO CONTROL
DEAR BOB: About a year ago, we bought our 5-year-old condo. The complex is still run by the developer. We are not yet an official condo homeowner’s association, and we have no control running our building although we have to pay monthly dues. There are never any condo owner’s meetings or reports as to how our money is spent. The developer says we will become a condo homeowner’s association after 75 percent of the units are sold. Can we expect reports where our money goes? – Gary T.
DEAR GARY: The situation you describe is outrageous. Before you bought, you should have asked questions about the homeowner’s association, its reserves, and for copies of the monthly owner’s association meetings for the last six months.
If the developer still controls many units, he might never give up control over his little kingdom. You and the other condo owners should consult a real estate attorney who specializes in condominium law.
PARTITION LAWSUIT DOESN’T APPLY TO REALTY PARTNERSHIPS
DEAR BOB: You recently had a question and answer about a separated wife who wants to sell her home but her husband doesn’t want to sell. The answer was a “partition lawsuit” could force the sale of the property. However, my situation is I own income property in a partnership. Can one partner force a sale of the property if the other partners don’t want to sell? – Edmond S.
DEAR EDMOND: The general answer is “no” because the terms of the partnership agreement control when the property can be sold. Most partnerships provide for a majority vote on major decisions such as sale of the property. For full details, please consult a real estate attorney in the state where the property is located.
NO TAX DUE ON CHANGED PROPERTY USE
DEAR BOB: Years ago, I wanted to buy a home but couldn’t afford one. A solution arose when my widowed mother had to move from her apartment due to a highway project. I suggested we buy a two-family building where she could be my tenant. Over the years, she paid me fair market rent and I took the usual income-tax benefits on my tax returns. She passed away recently. But I am in a dilemma. The building doesn’t afford much privacy between the two units. I am wary of renting to a stranger who might have noisy children. Can I convert the rental unit to my personal use without a big “hit” on my taxes? – Don H.
DEAR DON: Yes. There is no capital gains or other tax due when you convert a rental unit to your personal unit. There is no law requiring you to rent your mother’s former residence. Of course, if you make structural changes to join the two units, you might need a building permit.
NO TAX BREAK FOR SALE OF VACATION HOME
DEAR BOB: Since 1971, we have owned a secondary vacation home on a lake about 35 miles from our primary home. Is it possible to avoid capital gains tax on our approximate $500,000 gain if we sell it since we have occupied it for summers and weekends for total time over 24 months during the 60 months before its sale? But we never received mail there, nor licensed a vehicle there. We only have utility bills as proof of occupancy. My husband has cancer and cannot maintain the property so it needs to be sold – Margie F.
DEAR MARGIE: Unfortunately, there is no tax break available for the sale of second or vacation homes, unless you want to convert it to a rental property before sale and then make an Internal Revenue Code 1031 tax-deferred exchange for another rental property of equal or greater cost.
Because your second home clearly was not your primary residence for at least 24 of the 60 months for its sale, the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) is not available. For full details, please consult your tax adviser.
MANUFACTURED HOME SHOULDN’T BAR A REVERSE MORTGAGE
DEAR BOB: I am very angry. I own my home in a gated, upscale community of manufactured homes. As I am 79 and need extra income, I decided to apply for a senior citizen reverse mortgage. I paid in advance for the appraisal which was fine. But I received a form letter stating my property was rejected because the property is “unacceptable.” The sales agent for the reverse mortgage company was shocked. Do I have any recourse? – Patricia S.
DEAR PATRICIA: Yes. You should make a very polite phone call to the reverse mortgage origination company and ask to speak with a supervisor. All three major reverse mortgage lenders – FHA, Fannie Mae and Financial Freedom Plan – approve reverse mortgages on manufactured homes.
Your personal credit and income are irrelevant (unless you have a recent bankruptcy). Presuming your home is in good condition, the only reason for your reverse mortgage rejection could be your house is not on a separate lot to which you hold the deed.
More details are in my new special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery 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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