DEAR BOB: As a result of my divorce settlement, I am the sole owner of the house where I lived since 1977. The purchase price was $113,000. Today, I can sell it for $900,000. I am aware I can get that $250,000 principal residence sale tax exemption you often discuss, but I need to know how the taxes are calculated. Did my basis change when the house was deeded to me as the sole owner in 2003? –Tatiana S.
DEAR TATIANA: Before selling your home, please consult your personal tax adviser to go over the exact home sale price details. Because interspousal real estate title transfers are usually tax-free, from your description it appears you will owe tax on the entire capital gain, minus your $250,000 principal residence sale tax exemption of Internal Revenue Code 121.
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Your taxable capital gain appears to be the $900,000 sales price, minus your $113,000 adjusted-cost basis, minus your $250,000 exemption, or $537,000.
If any capital improvements were added to the home during ownership, those costs will increase your basis (thus reducing the capital gain). Also, you can subtract sales costs, such as the real estate sales commission and transfer fees.
At the current federal capital gains tax rate of only 15 percent, plus any applicable state tax, your tax situation appears to be very advantageous.
WHO PAYS TO MAINTAIN EASEMENT OVER NEIGHBOR’S LAND?
DEAR BOB: I own a right-of-way across my neighbor’s land to the public road. It predates both my ownership of my property and my neighbor’s ownership of his parcel. The right-of-way agreement gave my neighbor the right to use the right-of-way if he helps maintain it. Recently, my neighbor used this driveway to have a contractor bring in heavy equipment for land clearing. This equipment damaged the right-of-way. Is my neighbor responsible for repairing this damage? What are my rights to limit access to this right-of-way? –Tom C.
DEAR TOM: Please consult a local real estate attorney to review the documentation. From your description, in the absence of any maintenance agreement in the recorded easement, it appears the neighbor damaged your easement driveway and he should pay for necessary repairs.
The best way to resolve this issue is a friendly face-to-face discussion with the neighbor.
If he refuses to pay for necessary repairs, a letter from your attorney to him would be appropriate to insist the neighbor repair the driveway within 30 days.
In the event of no results, a stronger letter explaining you have no alternative but to have the repairs made, and you shall expect the neighbor to pay for those repairs, would be appropriate. Should the neighbor still fail to pay, the local Small Claims Court is your next resource.
PARTIAL TAX-DEFERRED EXCHANGE AVOIDS FULL TAX
DEAR BOB: When you sell a home via an Internal Revenue Code 1031 tax-deferred exchange, must all of the funds be reinvested in one or more rental properties? Or can some of it be claimed as capital gains on the income tax return? –Jean L.
DEAR JEAN: I presume you intended to say “rental home.” If the property is your personal residence, it is not eligible for an IRC 1031 tax-deferred exchange.
To qualify for a 100 percent tax-deferred IRC 1031 exchange, the property seller cannot take out any cash or other taxable “boot” such as net mortgage relief.
However, if you want to take out some cash from the investment or business property trade, such as $50,000, you can make a partial tax-deferred exchange for another “like- kind” rental or investment property. But the $50,000 cash you receive in this example would be taxable as a capital gain and the balance of your capital gain will be tax-deferred. For full details, please consult your tax adviser.
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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