DEAR BOB: We own three houses; one is a rental. We have owned house number one, our primary residence, for 18 years. We want to sell it in 2006 to get the $500,000 tax credit. House number two has been owned for two years. We moved in during 2005 and want to sell it in 2008 to take the $500,000 tax credit. House number three, the rental, will be our last move if we can sell it in 2010 for the $500,000 tax credit. Can this be done? –Lil H.
DEAR LIL: Yes. To qualify for the Internal Revenue Code 121 principal residence sale tax exemption (NOT a tax credit; there’s a BIG tax difference) up to $500,000 for a qualified married couple filing a joint tax return (up to $250,000 for a single homeowner), you must own and occupy your primary residence at least 24 of the 60 months before its sale.
Purchase Bob Bruss reports online.
I presume you meet the occupancy test for house number one, so you can sell it in 2006 and claim up to $500,000 principal residence sale tax-free profits.
As for house number two, into which you moved in 2005, after 24 months of ownership and occupancy within the 60 months before its sale, it can also qualify for the tax exemption up to $500,000 described above. If you sell it in 2008, you can again qualify for the IRC 121 tax exemption if it has been at least 24 months after the sale of house number one.
The tax reason is IRC 121 can only be used once every 24 months. But there is no limit to the number of times you can use this generous tax exemption.
Therefore, you can again qualify to use IRC 121 for the sale of house number three (the current rental house) if it is your principal residence at least 24 of the 60 months before its sale and if you have not used IRC 121 for at least 24 months. For more details, please consult your tax adviser.
WHY LIFE ESTATE PREVENTS HOME EQUITY LOAN
DEAR BOB: My two sisters and I hold the title to my mother’s house, but she holds a life estate. There is no mortgage. We want to take out a home equity line of credit to pay for a new roof and other repairs. But two banks told me they wouldn’t approve such a loan because of the life estate. However, my mother can’t apply for a home equity loan because she doesn’t hold title. This doesn’t make sense. Are we being told the right information? –Carolyn T.
DEAR CAROLYN: It makes a great deal of sense for every home equity lender in the nation to reject your home equity loan request. The reason is, if the lender has to foreclose for non-payment, it can’t terminate your mother’s life estate (unless she renounces it or dies) to obtain marketable title.
Now you know a major reason I highly discourage life estates. I don’t know who advised deeding the property to you and your sisters with your mother keeping a life estate, but that was a major mistake. Now she can’t get a home equity loan, or even a senior citizen reverse mortgage if she is 62 or older.
Your mother can renounce her life estate to the remainderpersons (you and your sisters) by signing a quitclaim deed. Then the co-owners can obtain a home equity credit line to pay for a new roof and other repairs. For more details, please consult a local real estate attorney.
CAN LAND SELLER DISCRIMINATE BY REQUIRING PURCHASE OF ADJOINING LAND?
DEAR BOB: A four-acre land parcel is listed for sale on the MLS (multiple listing service) for $120,000. The listing says the parcel must be sold with the adjoining 15-acre parcel for $600,000. That parcel has a separate MLS listing with the same term. The parcels are owned by unrelated people. I want to buy the $120,000 parcel but have no desire to buy the $600,000 property. Can I pay full price with no contingencies? Is the requirement that both parcels be purchased together legally enforceable? It strikes me as discriminatory –Tom M.
DEAR TOM: This situation doesn’t sound like illegal discrimination based on your race, national origin, age, sex, religion, etc. Instead, there might be a legitimate reason the adjoining owners want to sell their properties to the same buyer.
A polite phone call to the listing agent should clarify the reason. Perhaps there is an encroachment. Maybe there is an easement problem. There could be many other possible reasons.
If you want to buy the $120,000 parcel, but not the other, make your written purchase offer (preferably through your own buyer’s agent so you will be fairly represented). The seller of the four acres can reject your purchase offer without giving a reason. Or he can counteroffer.
Although it seems very strange, insisting the buyer purchase the adjoining parcel does not appear to be a prohibited discriminatory requirement. For more details, please consult a local real estate attorney.
MUST CO-OWNERS SPLIT TAX DEDUCTIONS EQUALLY?
DEAR BOB: In late 2004, I bought a second home in Hawaii. I have a partner who paid 10 percent of the 20 percent cash down payment. He is on the title as joint tenancy with right of survivorship. We share expenses and will share the profit upon selling. The property is rented to a tenant, but the mortgage is in my name alone, since his credit was not as good as mine. Since the mortgage is mine, can I solely deduct the mortgage interest and all other tax deduction, or do I have to share with him? –Richard P.
DEAR RICHARD: Your name on the mortgage is irrelevant. You are 50/50 co-owner partners.
That means you and your co-owner should prepare a profit and loss statement for the property, showing all the rent income received and all the expenses paid. Of course, please be aware only the mortgage income paid is a tax-deductible expense. The small principal payment is not a deduction.
Then divide the rent and expenses 50/50 with your co-owner. Each co-owner then reports his half of the income and expenses on Schedule E of his income tax return. For more details, please consult your tax adviser.
HIRE EXPERT APPRAISER TO DETERMINE 1993 PROPERTY VALUE
DEAR BOB: My late father and his wife owned and operated a bed and breakfast inn. Upon his death in 1993, his wife received a 50 percent ownership and we four children each received 12.5 percent. She continued to live in and operate the inn until she sold it in 2005. Each of us children received our 12.5 percent proceeds from the sale. But figuring out our capital gains tax has me baffled. Should we hire a local Realtor to do an historical assessment to come up with a market value for our 1993 stepped-up basis? –Sue B.
DEAR SUE: Determining the past market value of a property 13 years ago when your father died is not easy, even for an experienced appraiser. It is definitely not a task for a Realtor (who specializes in estimating current market values).
The Appraisal Institute in Chicago has a nationwide list of experienced appraisers who specialize in determining past real estate market values. Their Web site is www.appraisalinstitute.com.
I suggest you contact that organization to see if they have a licensed appraiser who is up to your challenging assignment. Be sure to get the appraiser’s fee in writing before you and the other heirs agree to hire that appraiser.
By determining the 1993 stepped-up market value basis, that information will benefit all the heirs who should share in the cost of the appraisal. The higher the appraised stepped-up market value in 1993, the lower your taxable capital gain.
NO TAX DEDUCTION TO LOOK AT VACANT LOT IN GEORGIA
DEAR BOB: Can I deduct my expenses to visit and oversee my unimproved vacant lot in Georgia? The lot was purchased two years ago with intent to build on it in five to 10 years when I near retirement. What if I decide to sell this lot and I want to buy a better one? –Darlene W.
DEAR DARLENE: If you bought the lot for personal use, and it does not produce rental income, unless you can prove it was purchased for business or investment use, your travel expense to visit and inspect it is not an “ordinary and necessary” tax-deductible business expense.
However, if the property is rented to tenants, your rental income must be reported on Schedule E of your tax returns where you can deduct ordinary and necessary expenses to periodically inspect your rental property.
From your description, it appears you made a personal non-business property purchase so your travel expenses are not deductible. However, if you decide to make a trade of your lot for another “like kind” property, you might qualify for an Internal Revenue Code 1031 tax-deferred exchange. Please consult your tax adviser for details.
The new Robert Bruss special report, “2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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