DEAR BOB: We own a rental property that was not properly set up two years ago to “stepped-up basis” when title passed from a deceased spouse to a surviving spouse. Should we amend the tax returns to reflect the higher basis or begin the adjusted cost basis for depreciation purposes in 2006? We are thinking of selling the property. –Rebecca C.
DEAR REBECCA: You can amend your income-tax returns for the last three “open” tax years. From your description, I would do so.
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Especially if you are thinking of selling the property, the stepped-up basis to market value on the date of death will reduce your capital gain. Yes, the higher basis will also increase your depreciation deduction for the last few years and increase the special 25 percent federal depreciation recapture tax when you sell, but that will probably be more than offset by the lower capital gains tax. Ask your tax adviser to explain further.
DON’T ALLOW NEIGHBOR’S FENCE TO ENCROACH ON YOUR LOT
DEAR BOB: I have a bit of property-line drama with my neighbor. She recently took down the fence between our two lots and is “pushing” her yard about 18 inches onto my lot with a new lawn and new gate. Before she completes the new gate, which will encroach on my lot, what should I do to prevent her from gaining an easement with my implied consent? –Laurie K.
DEAR LAURIE: Run, don’t walk, to a real estate attorney’s office. If you allow the neighbor to continue building the gate on your property, she could gain the right to a permanent encroachment. You might not care, but when you eventually sell your home, your buyers probably will care.
The real estate attorney will probably suggest obtaining a court injunction to stop construction of the encroaching gate. Don’t sit on your legal rights. If you do nothing and watch the construction proceeding, knowing it is an encroachment, the neighbor might use the legal defense of “laches.” That means an unreasonable delay enforcing your legal rights when you could have acted promptly.
HOUSE SALE TO DAUGHTER MAY BE TAX-EXEMPT
DEAR BOB: We would like to sell our house to our adult daughter and then split the money between her and our other daughter. Do we have to pay capital gains tax? –Gus M.
DEAR GUS: If you sell real estate, even if you sell to your daughter, and receive more than your adjusted cost basis from the buyer, that is a potentially taxable capital gain to you. But you can make tax-free total lifetime gifts, requiring a federal gift tax return, up to $1 million for you and $1 million for your spouse.
However, if the property sale qualifies as your principal residence under Internal Revenue Code 121, then up to $250,000 of your gain (up to $500,000 for a qualified married couple) can be tax exempt. To qualify, you must have owned and occupied your principal residence at least 24 of the last 60 months before the sale. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Everything Home Sellers and Their Realty Agents Need to Know About the $250,000 Tax Exemption Rules,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).