DEAR BOB: My mom transferred the deed on her house into my name a couple of years ago. After she passes away and I sell the house, what kind of taxes should I anticipate? –Donna B.
DEAR DONNA: When your mom gifted the house to you, as the donee you took over your donor’s presumably low adjusted-cost basis. Her basis was the purchase price, plus closing costs that were not tax deductible at that time, plus the cost of any capital improvements she added.
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If you added capital improvements after you became the legal owner, those costs will increase the adjusted cost basis you took over from your mother.
Or, perhaps, your mother acquired title by inheritance. Then she received a “stepped-up basis” to market value on the date of the decedent’s death. That would be your adjusted cost basis, plus improvement costs.
While your mother is still alive, it is important for you to have a conversation with her to determine her adjusted-cost basis at the time she deeded the house to you. That basis becomes your basis, plus any capital improvements you added.
The difference between your adjusted cost basis and the adjusted or net sales price is your taxable capital gain.
Unless the home is your principal residence for at least 24 of the 60 months before its sale (so you can qualify for up to $250,000 tax-free home sale profits under Internal Revenue Code 121), your capital gain will be taxed at the 15 percent federal tax rate, plus applicable state tax. For full details, please consult your tax adviser.
WHEN DOES CAPITAL GAIN HOLDING PERIOD BEGIN?
DEAR BOB: I am renovating a property with the intent to resell at a profit. I want to either do a Starker tax-deferred exchange (Internal Revenue Code 1031(a)(3)), or if I hold it long enough to qualify for a long-term capital gain, to sell it and pay the 15 percent federal tax rate. A real estate developer I talked with says he starts the 12-month long-term capital gain holding period on the date he signs the purchase contract. This makes a big difference to me. I tried to close the purchase last May, but the seller pushed the closing off until August –Blair D.
DEAR BLAIR: To qualify for the federal long-term capital gains tax rate, currently a 15 percent maximum, the IRS says you must hold title at least 12 months.
However, an exception occurs if you acquired “equitable title” before taking “legal title” by deed.
An example of owning equitable title, but not legal title, occurs for the thousands of property buyers who are purchasing under a land contract for deed, often called an installment land contract and other names. Then the date of signing the agreement starts the running of the 12-month capital gains holding period.
However, that doesn’t appear to be your situation. Your developer friend is mistaken.
The long-term capital gain 12-month minimum holding period does not begin at the signing of the sales contract unless there is evidence of also transferring equitable title, including the benefits and burdens of ownership at that time. For full details, please consult your tax adviser.
WATCH OUT FOR IRS TAX LIEN IF YOU BUY AT A FORECLOSURE SALE
DEAR BOB: If I buy a house at a foreclosure sale auction, and if that house has an IRS tax lien, is it true that tax lien will drop off only if the taxpayer or I pay the lien amount? Or, will the lien drop off automatically after the property changes ownership? –Greg O.
DEAR GREG: If you are the successful high bidder at the foreclosure auction, you will receive title “subject to” the recorded IRS tax lien. If the lien was recorded before the loan that is being foreclosed (highly unlikely), you become obligated to pay that tax lien or the IRS can wipe you out by foreclosing on its tax lien.
More likely, the IRS tax lien is “junior” to the mortgage being foreclosed. In this situation, if the IRS was given proper advance notice of the sale by the foreclosing lender, the IRS then has an automatic 120-day redemption period after the sale.
That means the IRS then has up to 120 days to pay the successful high bidder the amount paid at the foreclosure sale, plus any “necessary expenses” such as payment of any other superior liens or the fire insurance bill.
For this reason, if you are the successful high bidder at the foreclosure sale, don’t pay any nonessential expenses until the IRS 120-day redemption period expires. To illustrate, if you spend $5,000 fixing up the property before the IRS exercises its redemption right, the IRS won’t reimburse you the unnecessary $5,000. For more details, please consult a local real estate attorney.
SHOULD REALTY AGENT GIVE DISCOUNT TO SELLER BUYING ANOTHER HOUSE FROM THE SAME AGENT?
DEAR BOB: I am selling my home and buying another home through the same real estate agent. He asked me to pay a full 6 percent sales commission for selling my home. Is that fair? Shouldn’t I get a discount since he is my agent for both selling and buying? –Nanda P.
DEAR NANDA: As famous negotiator Herb Cohen says in the title of his great book, “Everything is negotiable.” That rule is especially true in real estate sales.
If your real estate agent is smart, he will offer you a strong incentive to stick with him when you buy your next home. But be sure to get your commission adjustment agreement in writing so there is no misunderstanding.
The easiest place to negotiate the sales commission is on the sale of your home because the seller usually pays the commission. However, your sales agent could offer you a rebate on your home purchase.
But the states of Alaska, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Tennessee, and West Virginia prohibit paying realty sales commission rebates to unlicensed buyers. For more details, please consult a local real estate attorney.
ARE AUCTIONS ADVISABLE TO SELL HOUSES?
DEAR BOB: I am interested in attending a forthcoming real estate auction. But why would someone auction off their home instead of putting it on the market for sale with a real estate agent? –Angela N.
DEAR ANGELA: By law, some properties can only be sold at a public auction, such as mortgage and deed-of-trust foreclosure sales, property tax lien sales, IRS tax lien sales, and judgment lien sales. The exact procedures for each type of auction sale vary by the type of sale and the state where the property is located.
If a forced sale is not involved, professional real estate auctioneers argue they can get a higher price than can a real estate agent listing a home in the “normal” way.
Auctions are often used where many properties of similar type are to be sold, such as a development of unsold condos or townhouses. The best auctioneers create “auction fever” to obtain high prices, often by providing easy financing for buyers.
Personally, I think auctioning a single-family house cheapens it, creates a distress market mentality, and limits the number of prospective buyers. As a property buyer, I prefer to negotiate with the seller rather than compete with other bidders.
However, if I was a home seller and the local market was weak, I would consider an auction to get rid of my house at a reasonable net sales price. If you bid at a real estate auction, be sure to carefully read the rules because you may become obligated to pay the auctioneer’s fee if you are the successful high bidder.
NO EASY WAY TO GET EX-SPOUSE TO REFINANCE THE HOUSE
DEAR BOB: My ex-wife and I obtained a “friendly divorce” about four years ago. She got the house. That’s fine with me because she also got the credit card bills that she has paid in full. But she refuses to refinance the 7.25 percent mortgage which shows up on my credit report. Fortunately, she pays on time, but I recently remarried and want to buy a house with my new wife. I can’t, however, qualify for another mortgage because the old mortgage still shows up on my credit report. What can I do? –Ted W.
DEAR TED: Unfortunately, there is nothing you can do to force your ex-wife to refinance the mortgage on the house. This is a very common situation in divorces, which your divorce attorney should have discussed with you and your ex-wife. But now it’s too late.
However, I understand some “enlightened” mortgage lenders will approve a home mortgage in your situation if you fully explain. Working with an experienced mortgage broker could be very productive.
The new Robert Bruss special report, “How to Earn Your First Profit When Buying Your Home or Investment Property Right,” 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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