DEAR BOB: I sold my condo and paid no capital gains tax because I owned and lived in it over 24 of the 60 months before its sale. Now I want to sell my house I own with my girlfriend. We are tenants in common and have both lived there over 24 months. Will her half of the $250,000 be tax-free? Would a tax-deferred exchange work better? – John F.
DEAR JOHN: Because you recently used your Internal Revenue Code 121 principal residence sale exemption up to $250,000 for your condo sale, you can’t use it again for 24 months (even if you meet the 24 out of last 60 months ownership and occupancy test for your house).
Purchase Bob Bruss reports online.
However, since your girlfriend co-owned and occupied the house at least 24 of the last 60 months before its sale, she is now eligible for up to $250,000 tax-free principal residence sale profits. But you are not eligible because you just used your $250,000 entitlement when selling your condo.
To make your half of the house sale eligible for up to $250,000 tax-free profits, you need to wait at least 24 months after your last use of the IRC 121 exemption.
If you keep using IRC 121 over and over (which I encourage), you will become known among your friends as a “serial home seller.” More details are in my brand new special report “How to Earn Up to $250,000 (or more) Tax-Free Profits Every 24 Months Buying and Selling Houses” 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.
RECOMMENDED BOOKS FOR BEGINNER REAL ESTATE INVESTOR
DEAR BOB: Can you recommend a couple of good real estate books to help me get started investing in real estate? – Rick L.
DEAR RICK: Although you didn’t indicate what type of real estate investments you prefer, I suggest you start with single-family houses and small income properties.
I highly recommend these two recent books by successful investors: (1) “Building Wealth One House at a Time” by John Schaub, and (2) “Start Small, Profit Big in Real Estate” by Jay DeCima. Both books are available in stock or by special order at local bookstores, public libraries, and www.amazon.com.
COSTLY RESULTS OF HOME BUYER’S REMORSE
DEAR BOB: We recently signed a purchase contract to buy a house, using $25,000 as the required deposit. A week later, after working our mortgage payment numbers, we found we could not afford to buy it. After many sleepless nights, we told our real estate agent we had to back out of the contract. What are we responsible for? Could we lose our deposit? Can other action be taken against us? – Robert P.
DEAR ROBERT: Your situation should be a lesson to all prospective home buyers to know what you can afford before signing a home purchase contract.
It sounds like you have a severe case of “buyer’s remorse” which could have been prevented if you were pre-approved in writing by a mortgage lender. The lender wouldn’t approve a mortgage you can’t afford.
After your default, your home seller has a legal obligation to mitigate damages. That means the seller and the listing agent must try to sell the home for the same or better price and terms than you offered. If that isn’t possible, you could be held liable for the seller’s damages.
Depending on the wording of the sales contract, you might be liable for loss of the entire $25,000 good faith deposit. However, if the sales contract says the deposit is agreed to be “liquidated damages” in the event of the buyer’s default, then you can’t be held liable for any additional damages. For full details, please consult a local real estate attorney.
ONE-YEAR HOME SELLER MORTGAGE CARRYBACK IS TOO SHORT
DEAR BOB: My daughter rents a townhouse that the landlord wants to sell. She wants to buy it, but she has no money for a down payment. The landlord has agreed to continue renting to her for a year if she wants to stay. I suggested she ask him to sell to her and carryback the mortgage for a year until she can get a mortgage from a bank. The landlord is asking $89,000 but the townhouse is probably worth much more in a good neighborhood of Jacksonville, FL. My daughter has debts which preclude her from getting a mortgage for at least a year. What is the best way to handle this situation? – Mae LeB.
DEAR MAE: Presuming the landlord owns the townhouse free and clear with no mortgage, and the landlord likes and trusts your daughter, ask him to carry back the mortgage for several years rather than just 12 months.
That will give your daughter adequate time to get her financial house in order before she applies for a home loan from an institutional lender. Seller financing is always the best way to buy a home. But a one-year mortgage is highly risky for your daughter.
HOW TO CALCULATE PROFIT ON TWO “FLIPPER” PROPERTY SALES
DEAR BOB: I recently “flipped” two brand new condos, buying and selling them within four months. How do I calculate my adjusted cost and my adjusted sales price? Should I include my purchase price, mortgage interest, home owner association dues, property taxes, and monthly utilities? When calculating my adjusted net sales price, can I deduct the closing costs and the realtor’s sales commission? – Kasen T.
DEAR KASEN: Congratulations on your profitable “flipper” transactions. The only unfortunate part is your profit is fully taxable as ordinary income because you did not hold title over 12 months to qualify for a long-term capital gain.
When calculating your adjusted cost basis, you include the purchase price and capitalize the closing costs that were not tax deductible at the time of purchase. As for your carrying costs, such as mortgage interest, home owner association dues, property taxes and monthly utilities, they should be deducted on Schedule E or C of your income tax returns.
As for determining your adjusted or net sales price, the realtor’s sales commission and closing costs are subtracted from the gross sales price. Then subtract your adjusted cost basis from the adjusted sales price to determine your taxable ordinary gain. For full details, please consult your tax adviser.
WHEN PARTIAL $250,000 HOME SALE TAX EXEMPTION RULE APPLIES
DEAR BOB: On May 21, 2004 my wife and I bought our home. If we sell after living it for one and a half years, are we entitled to any credit to avoid paying capital gain tax on our sale profit? – Walter B.
DEAR WALTER: If you sell your principal residence after less than 24 months of ownership and occupancy during the 60 months before its sale, Internal Revenue Code 121 says you are not eligible for tax-free profits up to $250,000 (up to $500,000 for a qualified married couple filing jointly).
However, you might be entitled to a partial exemption (75 percent in your situation) based on 18 of the required 24-month occupancy.
To qualify for the partial exemption, your principal residence sale must be due to health reasons, change of employment location which qualifies for the moving expense tax deduction, or unforeseen circumstances, such as divorce, death in immediate family, unemployment, multiple births from the same pregnancy, residence damage from natural or man-made disaster, and condemnation or involuntary conversion. For full details, please consult your tax adviser.
REVERSE TAX-DEFERRED EXCHANGE IS LEGAL, BUT DIFFICULT
DEAR BOB: We own a rental house that we want to sell so we can acquire another rental property. The house has a lease until March 2006 after which we will sell it. However, we already found another suitable rental property replacement to acquire in a tax-deferred exchange. But the seller wants to close by November 2005. Can we do an Internal Revenue Code 1031 tax-deferred exchange? – Alvin D.
DEAR ALVIN: Yes. The situation you describe, where the replacement rental property is acquired before the old rental property is sold, is called a “reverse tax-deferred exchange.” It is perfectly legal under Internal Revenue Code 1031.
However, you can’t take title to the replacement property in your name until you sell your current rental property.
Title must be taken in the name of the third-party intermediary who will handle your IRC 1031 tax-deferred exchange. Further details are in my special report “How the New Tax-Deferred Exchange Rules Can Make You Very Wealthy” 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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