DEAR BOB: About 10 years ago, my parents gave me a gift deed to their house for which they paid about $57,000 many years earlier. Today, it is worth around $275,000. They continued living in it ever since. Now they want me to sell it so they can use the money to move to Florida and buy a small house. I’ve been paying the property taxes and repairs on the house all these years, and it doesn’t seem fair that I should have to sell the house. Would I owe any tax on this sale? –David R.
DEAR DAVID: Yes. Your situation is another bad example of why it usually is not smart for parents to gift real estate to their adult children.
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Frankly, I am surprised that after letting your parents live in the house they gave you and paying its expenses, they want you to sell it and give them the money to move to Florida.
To make matters worse, as the donee of their gift deed, you took over their low $57,000 adjusted cost basis. Your taxable capital gain will be the approximate $218,000 difference between your $57,000 cost basis and the $275,000 adjusted (net) sales price.
If they had retained title, their sale profit would be tax-free thanks to the Internal Revenue Code 121 principal residence sale exemption up to $250,000 (up to $500,000 for a married couple filing jointly). That presumes they owned and occupied the house at least 24 of the 60 months before its sale.
However, since the property wasn’t your principal residence, although you generously paid its expenses, you can’t qualify for this tax break. For more details, please consult your tax adviser.
CAN NEWLY MARRIED COUPLE SELL TWO HOUSES IN ONE YEAR TAX-FREE?
DEAR BOB: My wife and I married about eight months ago. Before marriage, she owned her condo and I owned my single-family house. Both were our principal residences for several years. We want to sell both the condo and the house in 2006. Can we do so and each claim the $250,000 tax exemption? –Edward H.
DEAR EDWARD: Yes. If your wife held title to her condo in her name alone, and meets the 24-out-of-last-60-months ownership and occupancy test of Internal Revenue Code 121, then she can claim up to $250,000 tax-free on the sale of her principal residence.
The same applies to you if you meet the tests for your house. For full details, please consult your tax adviser.
CAN HOME BUYER CANCEL PURCHASE FOR LACK OF A MORTGAGE?
DEAR BOB: Several months ago, we contracted to buy a new house under construction. Now we have learned several very unfavorable things about the builder and the subdivision. We applied for a mortgage but the best we can get is far worse that what was specified in our purchase contract. Can we cancel the purchase and get our $10,000 good faith deposit refunded? –Macy R.
DEAR MACY: To cancel a home purchase contract due to inability to obtain a mortgage on the terms specified in the purchase contract, you must show a good faith effort to obtain such financing.
If you just applied with one mortgage lender, that’s not enough. However, if you were turned down by several mortgage lenders, that shows your good faith and should entitle you to a refund of your $10,000 deposit. For full details, please consult a local real estate attorney.
The new Robert Bruss special report, “Pros and Cons of Today’s Five Best Real Estate Profit Opportunities,” 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 delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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