DEAR BOB: I own a home in Florida, which is my legal “main home” residence. I spend about six months every year in that home and about six months in my other home. If I sell the Florida home, I assume I will have no capital gains tax because it is my primary residence. Can I then move to my other home, making it my principal residence for 24 out of the last 60 months and claim the home-sale tax exemption again? – Jim B.
DEAR JIM: Yes. It seems you understand Internal Revenue Code 121 very well. The IRC 121 exemption can be used once every 24 months. To qualify, you must own and occupy your principal residence at least 24 of the 60 months before its sale.
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If you are single, up to $250,000 of your capital gains from the home sale will be tax-free. If you are married and both spouses meet the occupancy test (only one spouse need be on the title), then up to $500,000 of your capital gains are tax-free if you file a joint tax return in the year of the home sale. For full details, please consult your tax adviser.
IS THERE AN INDUSTRY STANDARD TO MEASURE PROPERTIES?
DEAR BOB: As a real estate broker, we are often questioned about the accuracy of square-foot measurements. I say taking outside measurement is close enough. But my insurance agent says it must be done inside room by room. What is the industry standard? – Ken McN.
DEAR KEN: There is no industry standard for measuring residence square footage. Insurance agents and appraisers usually use the outside perimeter and then apply a construction cost of say, $150 per square foot, for replacement cost estimate purposes.
Of course, when measuring the rooms, you would use the inside useable square footage as measured from wall to wall.
As a real estate broker, you must be especially careful to never say a room measures 200 square feet, or 10 feet by 20 feet. Instead, always say the room is approximately 200 square feet or approximately 10 feet by 20 feet.
If you take the measurements off the seller’s house plans, or even from city records, always quote your source such as “according to city records.” Another “weasel clause” used on many MLS (multiple listing service) forms is “Information believed to be reliable but not guaranteed.”
HOW TO AVOID CAPITAL GAINS TAX ON THE SALE OF A VACANT LOT
DEAR BOB: How can I avoid capital gains tax when selling my free-and-clear vacant lot? Is the only way to do an Internal Revenue Code 1031 tax-deferred exchange? – Anna N.
DEAR ANNA: Yes, you can defer capital gain tax on the sale of your vacant lot by making an IRC 1031 tax-deferred exchange for another investment or business property. To qualify, the acquired property must equal or exceed the lot’s market value and equity.
However, if the lot adjoins your principal residence, and you sell both the lot and your home within 24 months, then the lot’s capital gain can also qualify for the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a married couple filing jointly). That’s presuming you owned and occupied your principal residence at least 24 of the 60 months before its sale. Please consult your tax adviser for full details.
The new Robert Bruss special report, “How to Avoid Buying or Selling a Bad ‘Lemon’ House,” is now 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.
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