DEAR BOB: I have been married 13 years. When we married, my husband moved into my home where we still live. I never added his name to my title, although his name is on the mortgage loan. We plan to sell the home in 3 1/2 years and use the money to build a home in North Carolina as our new residence. Will we have a problem with the home-sale tax exemption if we do not add my husband’s name to the title before selling our home? –Anita D.
DEAR ANITA: Presuming your husband continues to behave himself, and you both meet the 24-out-of-last-60-months-before-sale, principal-residence occupancy test of Internal Revenue Code 121, and if you file a joint income tax return in the year of the sale, up to $500,000 of your principal-residence-sale capital gains will be tax-free.
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IRC 121 does not require the names of both spouses to be on the principal residence title. For full details, please consult your tax adviser.
HOW TO CLEAR TITLE OF DECEASED CO-OWNER’S NAME
DEAR BOB: I recall a year or two ago you explained how to clear the title of a deceased co-owner’s name. Now my widowed mother needs to remove her late husband’s name from the title to her home. Can she do that herself or does she need an attorney? –Henry R.
DEAR HENRY: If title was held by two or more individuals in joint tenancy with right of survivorship, in most states all that is required to clear the title of the deceased joint tenant’s name is to record with the county or city recorder of deeds (1) a certified copy of the death certificate and (2) an affidavit of survivorship.
A phone call or visit to the local recorder of deeds office where the property is located will provide the exact local recording requirements. Most individuals do not need an attorney for this simple procedure.
However, if title was not held in joint tenancy with right of survivorship, probate of the deceased co-owner’s estate may be necessary to clear the title. An attorney’s services are definitely needed for that.
WHEN SELLING A PROPERTY FOR ITS PURCHASE PRICE IS TAXABLE
DEAR BOB: I recently sold a rental house I owned near Detroit. As you may know, that area is suffering a real estate depression due to the fact many people are moving away and few people are moving into that area. I felt very lucky to get a cash sale for the same price I paid for the house about six years ago. However, my tax adviser says I will owe tax on my sale because I had been claiming depreciation deductions for it as a rental. Is this true? –Martha S.
DEAR MARTHA: Yes. For example, let’s say you paid $100,000 for that rental house six years ago and you sold it for $100,000 net in 2006. As you were required to do, over the six years you deducted depreciation on Schedule E of your income tax returns. This is the same place you reported the rental income and applicable expenses, such as mortgage interest, property taxes, insurance and repairs. Depreciation is a noncash tax deduction for estimated “wear, tear and obsolescence.”
Suppose during the six years of rental property ownership, you deducted $12,000 for depreciation of the rental house (land value is not depreciable because land never wears out). That means your adjusted cost basis is $100,000 minus $12,000 depreciation, or $88,000. Presuming you didn’t make any capital improvements during ownership (which would increase your adjusted cost basis), you therefore had a $12,000 capital gain profit although you sold for $100,000 net in this example.
The result, as your tax adviser correctly informed you, is you have a $12,000 “profit.” To make matters worse, Uncle Sam has a special 25 percent recaptured depreciation tax rate. Also, don’t forget the state capital gains tax.
The new Robert Bruss special report, “The 10 Key Questions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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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