DEAR BOB: My husband died over a year ago, but his name remains with mine on the deed to my house and a few rental properties. Is there any advantage or disadvantage of leaving his name on these deeds? –Dorothy R.
DEAR DOROTHY: If title to your home was held with your late husband in joint tenancy with right of survivorship (or tenancy by the entireties in states where allowed) or in a revocable living trust, it is a very simple matter to clear the titles of his name. Probate court interference is not required.
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However, if title was held by some other method, such as tenancy in common, then probate court transfer of the titles may be required.
It is best to take care of clearing the titles promptly in case you decide to sell or refinance the properties. If you don’t already hold the titles in a revocable living trust, this would be a good time to also take care of that so your heirs won’t have any problems when you pass on. For full details, please consult a local trusts and estates attorney.
NO TAX DUE WHEN CONVERTING RENTAL TO PERSONAL RESIDENCE
DEAR BOB: In 1970 my husband and I bought some Montana land. In 1994 we traded it in an Internal Revenue Code 1031 tax-deferred exchange for a townhouse in Virginia, which we have continuously rented to tenants since then. Sometime after 1994 we received a notice from the state of Montana that we owed $70,000 in state capital gains tax for the sale of the Montana land. We contacted a Montana tax lawyer who took care of the matter, explaining we made an IRC 1031 tax-deferred exchange so we didn’t owe any state capital gain tax. If we move into our Virginia townhouse and live there for two years before selling it, if our profit does not exceed $500,000 we understand we won’t owe any federal capital gains tax, thanks to Internal Revenue Code 121. However, will the deferred capital gain tax be due in Montana or Virginia and what will our basis for the townhouse be? –Margaret N.
DEAR MARGARET: There will not be any tax due when you convert the townhouse from rental status to your personal residence. There is no sale so no tax will become due.
Since you have owned the townhouse well over the minimum five years required for a property acquired in an IRC 1031 exchange, after living in it for at least 24 months you then become eligible for the IRC 121 principal-residence-sale, $500,000 exemption for a married couple (up to $250,000 for single owners).
However, when you sell the townhouse, it won’t be a completely tax-free sale. You will owe “recaptured” federal tax on the depreciation you have deducted, plus applicable Virginia taxes.
As a general rule, your basis for property acquired in an IRC 1031 exchange will be its purchase price, minus the deferred capital gain from the sale of the Montana land, minus the depreciation you deducted during ownership, plus any capital improvements you made. For full details, please consult your tax adviser.
“OVER 55 RULE” HOME-SALE TAX BREAK WAS REPEALED IN 1997
DEAR BOB: When I am ready to sell my home, how do I combine the “over 55 rule” $125,000 tax exemption with the $250,000 principal-residence exemption rule you often discuss? –Susan R.
DEAR SUSAN: The old “over 55 rule,” $125,000 principal-residence-sale tax break was repealed in 1997. It was replaced with the far more generous $250,000 principal-residence-sale tax exemption of Internal Revenue Code 121, which is available to home sellers of any age.
To qualify, you must have owned and occupied your primary residence at least 24 of the last 60 months before its sale. Qualified married couples can claim up to $500,000 tax-exempt home-sale profits. Ask your tax adviser to explain further.
The new Robert Bruss special report, “Foreclosure, Short Sale and Distress Property Profit Secrets,” 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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