DEAR BOB: I own a two-family rental duplex and a single-family rental house. I want to sell the duplex and pay off some of the mortgage balance on the rental house. Under Internal Revenue Code 1031, can I invest the proceeds of the rental duplex sale to pay down the mortgage on the rental house without owing capital gain tax? –Simon B.
DEAR SIMON: No. Sale of the rental duplex and using the sales proceeds to pay down the mortgage balance on your already-owned rental house will not qualify as a tax-deferred exchange.
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To make an IRC 1031 tax-deferred trade, you must sell property held for investment or use in a trade or business, such as that rental duplex, and acquire a replacement investment or business property of equal or greater cost within the specified time limits. Your tax adviser has further details.
CAN FOREIGN OWNER QUALIFY FOR $250,000 HOME-SALE TAX EXEMPTION?
DEAR BOB: My older sister owns a house in California. But she has German citizenship and lives in Berlin. When she decides to sell the house, how can she avoid paying tax on the large capital gain? If she adds my name to the title (I am a U.S. citizen), will this help her for the $250,000 home-sale tax exemption? –Kim H.
DEAR KIM: The fact your sister is not a U.S. citizen does not disqualify her from claiming the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple). Foreigners are welcome to pay taxes here and to use applicable U.S. tax exemptions.
What currently disqualifies her is the fact she is not occupying that California house as her principal residence. To qualify for the IRC 121 tax exemption, she must own and occupy that house as her primary residence at least 24 of the last 60 months before its sale.
Adding your name to the title won’t help because you have no entitlement to the capital gain.
Unless your sister qualifies for IRC 121 by meeting the ownership and occupancy tests, when she sells that house her capital gain will be fully taxable. She should consult her U.S. tax adviser before selling.
DON’T EXPECT PROFITABLE HOME SALE AFTER JUST 12 MONTHS OF OWNERSHIP
DEAR BOB: I bought my house in December 2005, financing 100 percent of the purchase price with two mortgages. The house has been nothing but trouble. It was built in 1985. The so-called professional home inspector failed to point out the water heater was original and the attic air conditioner installed in 2003 was improperly installed, causing ceiling damage. What are my chances of unloading this house without losing my shirt? Property values in my area are holding steady. –Carey A.
DEAR CAREY: Your problems don’t sound too serious. I presume you have replaced the 20-year-old water heater and corrected the problem with the air conditioner.
It is virtually impossible to resell any house at a break-even price after only a year’s ownership without losing money after considering the sales costs such as realty sales commission and transfer expenses.
Why sell? This current “buyer’s market” in most cities is not a good time to sell unless you have a highly motivating reason, such as an out-of-town job transfer. Make the best of your zero-down mortgage financing and wait to sell until you have built up some equity by paying down the mortgage balances.
Even in the best of real estate times, it takes three to five years of home ownership to at least break even when selling. That’s why home buyers should not purchase unless they plan to stay at least five years.
The new Robert Bruss special report, “2007 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, Calif., 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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