Editor’s note: Robert Bruss passed away on Sept. 26, 2007. This was one of the last real estate columns he wrote. Inman News is publishing Bob’s last work as a final salute to the nation’s most well-known real estate writer.
DEAR BOB: How can I sell my vacation home without paying capital gains tax? –Kristie H.
DEAR KRISTIE: The only easy way to avoid tax on the sale of a vacation home is to sell it at a loss. Just joking!
Purchase Bob Bruss reports online.
Frankly, there is no way to sell a second or vacation home without paying capital gains tax. It is clearly not eligible for the Internal Revenue Code 121 principal-residence-sale exclusion up to $250,000 (up to $500,000 for a qualified married couple) because it was not your principal residence at least 24 of the last 60 months before its sale.
Of course, you could move in to make it your full-time principal residence for the next two years, thus qualifying for this exemption.
Neither is your vacation home eligible for an Internal Revenue Code 1031 tax-deferred exchange. The reason is it is not a rental or business property. Of course, you could rent the property to tenants for a year or so before selling, thus making it qualify for an IRC 1031 exchange. For further details, please consult your tax adviser.
ONE OR TWO EXEMPTIONS FOR ADJOINING CONDO SALES?
DEAR BOB: We own two adjacent condominiums, which we treat as a single home. One doorway connects the units, which can easily be re-divided into two separate condos. They are separately titled. One is in my husband’s name alone. The other is in my name and my husband’s name. We pay separate property taxes and condo fees for each unit. If we sell, how can we get the best tax advantages? If we can’t use that $500,000 exclusion on both properties at once, could we sell one unit now and the other in 24 months? Or, if we sell both units now, can my husband use the $250,000 exemption on his unit and I will use the $250,000 exemption on the other unit? –Laura B.
DEAR LAURA: If you don’t have a capital gains profit exceeding $250,000 on either unit, it would probably be best for you to take the exemption on one sale as your principal residence and your husband can take the exemption on his unit. This presumes you both meet the 24-out-of-last-60-months ownership and occupancy test of Internal Revenue Code 121.
Because you are likely to sell the two units to two different buyers, the approach above would probably be easier than combining the two condos into one sale unless you find a buyer who purchases both units. For full details, please consult your tax adviser.
WHAT IS ALL THE FUSS ABOUT SUBPRIME MORTGAGE DEFAULTS?
DEAR BOB: What is all the fuss about subprime mortgage defaults? Weren’t most of these home loans for more than 80 percent of the residence value, thus requiring PMI (private mortgage insurance)? So why are the lenders crying? The PMI is exactly for the event of a default by the buyer. Right? –Robert A.
DEAR ROBERT: You are absolutely correct. Some of the subprime mortgages have PMI, and the PMI firms will have to reimburse the mortgage lenders for losses on the top 20 percent of the defaulted loan losses.
However, many of the subprime mortgage borrowers didn’t have enough income or good enough credit to qualify for PMI. These subprime loans were made by nonregulated lenders, such as mortgage bankers, who are not required to have PMI on the top 20 percent of these loans. That’s the reason some mortgage bankers have gone broke or are in deep financial trouble.
The new Robert Bruss special report, “How to Profit from Lease-Options (Rent to Own) If You are a Property Buyer, Seller, or Realty Agent,” 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).