DEAR BOB: My wife and I plan to use our home equity to purchase an investment property. We wanted to do an Internal Revenue Code 1031 tax-deferred exchange, but I recently discovered we can’t do such an exchange with our personal residence. So we now are thinking of moving out of our primary residence and renting it for a while so we can later do an IRC 1031 exchange. How long must we rent the house before exchanging it to defer the tax? –Gincy H.
DEAR GINCY: The IRC 1031 statute and regulations don’t specify any minimum rental time after converting your personal residence into rental property before it can qualify for a tax-deferred exchange.
Purchase Bob Bruss reports online.
Most tax advisers suggest renting your former home at least six to 12 months (to show rental intent) before making an IRC 1031 tax-deferred exchange.
However, if you and your wife have less than a $500,000 capital gain in your personal residence, why not just make an Internal Revenue Code 121 tax-exempt sale? When both spouses occupied the primary residence at least 24 of the last 60 months before its sale, you can claim up to $500,000 tax-free profits. Then you won’t have the hassle of a tax-deferred IRC 1031 exchange. Ask your tax adviser for more details.
PROFESSIONAL HOME INSPECTION CLAUSE PROTECTS BUYER
DEAR BOB: My daughter is buying her first house. The professional home inspection revealed a leaky roof and the garage should be either torn down or rebuilt. How does she get a repair credit for these issues? The seller is also the real estate agent –Mike McD.
DEAR MIKE: Hopefully, your daughter’s purchase contract included a professional home inspection contingency clause, as it should. That means if your daughter doesn’t approve the results of the professional inspection, she doesn’t have to complete the purchase and can get her good faith deposit refunded in full.
However, in the “real world” what usually happens is the professional inspection report is shown to the home seller and negotiations are reopened. In today’s “buyer’s market” in most cities, sellers usually will give a reasonable repair credit off the agreed sales price to keep the buyer, such as your daughter, from canceling the sale.
If the seller refuses to give an acceptable repair credit, and if the purchase offer was contingent on results of the professional home inspection, then your daughter can get her deposit back and buy another home.
NO TAX DEDUCTION IF PAYOR IS NOT OBLIGATED
DEAR BOB: I am considering taking out a home equity loan on my home to be used as a down payment on a house for my son. What are the tax ramifications? Can he claim the interest paid as a deduction on his tax returns? –James B.
DEAR JAMES: If you take out a home equity loan secured by your home, even if your son makes the payments he cannot deduct the interest because he is not on the title to your home and he has no legal obligation to make those payments.
Of course, you can add him to your home title, but that brings up new considerations you might not want to encounter.
Another approach is for you to borrow the money on a home equity loan secured by your residence. Then loan the money to your son, secured by a second mortgage on the house he purchases.
Then when he pays you interest, it is on a mortgage secured by his personal home so the interest is tax deductible to him (and taxable to you, but also deductible to you when you make the home equity loan payments to the bank). For more details, please consult your tax adviser.
The new Robert Bruss special report, “How to Sell Your Home for Top Dollar in a Buyer’s Market,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card a 1-800-736-1736 or instant Internet 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).