Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, March 12, 2006.
DEAR BOB: I know you answered a similar question several months ago, but I don’t recall the answer. I own a six-unit apartment building, in which my wife and I have a large profit. If we make an outright sale, we will owe a huge capital gain tax. My wife remembered an item in your column saying we could make a tax-deferred trade of the apartment building for our “ultimate dream home,” and then we could sell the house in a few years to claim $500,000 tax-free profits. Is there a minimum holding time for the house? –Harold J.
DEAR HAROLD: Yes. You first can make an Internal Revenue Code 1031(a)(3) Starker tax-deferred exchange of your apartment building for your dream home.
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However, please remember the basic Starker exchange rules: 1) you must trade equal or up in both price and equity, 2) you can’t take any taxable “boot” such as cash or net mortgage relief out of the trade, 3) sales proceeds from the apartment building must be held by a qualified third-party intermediary accommodator, 4) you have only 45 days after the sale to designate the replacement property, 5) you must complete the title acquisition within 180 days, and 6) the house you acquire must be a rental at the time of acquisition.
Second, although there is no official IRS answer, most tax advisers suggest renting the acquired residence at least six to 12 months (to show investment intent) before converting it into your personal residence.
Third, to qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return), you must occupy the principal residence at least 24 of the 60 months before its sale.
Fourth, for residences acquired in an IRC 1031 tax-deferred exchange, effective Oct. 22, 2004, you must hold the principal residence at least 60 months to qualify for the IRC 121 exemptions.
This five-year rule applies only to residences acquired in a tax-deferred exchange. For other principal-residence sales, the minimum holding time is only 24 months (presuming the owner occupied the principal residence for the same period). For full details, please consult your tax adviser.
BE CAREFUL WHEN DEALING WITH OUT-OF-AREA REALTY AGENT
DEAR BOB: There is a house listed for sale in my town that has a “for sale” sign from a real estate brokerage that is located at least 125 miles away. Why would any home seller list with an agent whose office is so far? I might be interested in buying the house. Are there any special precautions? I tried phoning the brokerage and was told I had to have my own “buyer’s agent” call to inspect the house. Should I be wary? –Paul G.
DEAR PAUL: There are many possible reasons why that house is listed with an out-of-area realty agent. For example, many FHA, VA, and bank foreclosures are listed with one or two brokerages that handle sales throughout an entire region or state.
Frankly, this makes managing multiple foreclosed properties easier for the lender, but it is not the best way to earn top-dollar sales price. No out-of-area realty agent can do as good a sales effort as a local agent.
Another reason for listing with an out-of-area realty agent is the home seller might be a friend or relative of the listing agent. That’s no way to hire a listing agent, but many people do it anyway.
As a buyer, you definitely need your own “buyer’s agent” when attempting to buy a home listed with an out-of-area realty agent. Often, the house doesn’t have a lock-box and inspection access is not easy. Or it might be difficult to negotiate with the home seller through the out-of-area realty agent.
Personally, I’ve bought several bargain properties that were listed with out-of-area agents who had no clue as to the property’s true value. You might be on the trail of such a below-market price bargain purchase.
WHY IS THERE LITTLE INTEREST IN PROBATE PROPERTIES?
DEAR BOB: As a law student, I have become interested in possibly investing in probate properties. But I find there is little interest among real estate agents in listing and marketing such properties. Why? Do you think the probate property field is less crowded than for other investment properties? –Mr. B.K.
DEAR MR. B.K.: There are far fewer probate properties being sold by estates than there are other properties listed for sale on the open market.
As an investor, I’ve purchased several probate properties, but none was a simple routine sale. Dealing with heirs, executors, and attorneys is rarely easy.
One time I made an offer to buy a probate property where I later learned 29 heirs had to sign the acceptance. I quickly realized that property was a waste of time unless one heir could speak for the entire group.
An excellent recent book to read for more information on this topic is “Creating Wealth Through Probate,” by James G. Banks. It is available in stock or by special order at local bookstores, public libraries and www.amazon.com.
The new Robert Bruss special report, “2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” is 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).