DEAR BOB: My partner has owned his house for 22 years. I have lived in the same house for 12 years. We plan to sell the house next year. Are we eligible for the $500,000 principal-residence-sale tax exemption? –Ronald S.
DEAR RONALD: If your name is not on the deed, for federal income tax purposes you are not a co-owner entitled to the $250,000 exemption that a principal-residence owner can claim thanks to Internal Revenue Code 121. Of course, that’s presuming the owner has owned and occupied the principal residence at least 24 of the last 60 months before sale.
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A qualified married couple filing a joint tax return in the year of home sale can qualify for up to $500,000 tax-free principal-residence sale profits, but only one spouse’s name need be on the title. However, there is no similar exemption for partners who are not married unless both names are on the title. For full details, please consult your tax adviser.
IF LIFE TENANT DOESN’T PAY EXPENSES, SHE CAN BE REMOVED
DEAR BOB: My stepmother has a life estate in the house where she and my late father lived together. After his death, his will provided a life estate for her. When she passes on, I am to receive the house. But she is letting the house run down badly. Each year I have to remind her to pay the property taxes. Last year the taxes fell in arrears and the property was almost lost at a tax sale before she reluctantly paid. She has plenty of money but feels it is a waste to spend money on the house that I will receive when she dies. Do I have any recourse to end this nonsense that has been going on for years? –Ben S.
DEAR BEN: The terms of the life estate control your rights. You are the “remainderman.” All you can do is be sure the life tenant pays the property taxes, insurance and mortgage interest so the property is not lost by default.
Your one legal ground to terminate the life estate other than for nonpayment of those expenses is to prove your stepmother is committing “waste.” That means she is not maintaining the house.
However, proving “waste” is extremely difficult so don’t expect a judge to order the life estate forfeited for waste unless the house becomes extremely run-down.
EVEN BELOW-MARKET RENT MUST BE REPORTED ON SCHEDULE E
DEAR BOB: I own a condo that I rent to a mentally retarded nephew at a very low rent. He receives disability income SSI checks and is able to live alone. But he is not able to hold a job. Because the rent is so low, I understand I cannot claim the normal rental property tax deductions such as depreciation. Do I still have to report the low rent I receive? –Laura R.
DEAR LAURA: Yes. Rental income must be reported on Schedule E of your income tax returns. When you file your income tax returns, you should list all the applicable expenses such as for repairs, insurance, mortgage interest, property taxes and depreciation.
However, because of the very low rent, you can’t claim any loss deduction against your other ordinary taxable income. But the unused tax loss can be “suspended” for use in a future tax year. For details, please consult your tax adviser.
The new Robert Bruss special report, “How to Buy Fixer-Upper Houses with Little or No Cash for Fun and Fortune,” 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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