DEAR BOB: In 2001, my son got married and purchased a home, but the house is titled under his wife’s daughter’s name. The reason was my daughter-in-law owed the Internal Revenue Service a large amount of money. My son has paid all the expenses such as mortgage payments, property taxes and maintenance. His wife recently died of cancer. What are my son’s rights to this property? –Celia C.
DEAR CELIA: Your son should immediately consult a local real estate attorney. I presume the daughter is at least 18. The simple solution is for her to sign a quitclaim deed to your son.
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If she refuses to do so, it may be necessary for your son to bring a quiet title lawsuit against the daughter. But that could involve the IRS in the dispute, depending on the facts.
This situation shows the very high risk your son created by not insisting his name be on the home’s title at the time of purchase. Unfortunately, although your son has paid all the expenses, the court might determine he has no right to ownership.
STEPPED-UP BASIS ONLY APPLIES TO INHERITED PROPERTY
DEAR BOB: Your educational and entertaining articles are a highlight of reading the newspaper. I wish they ran every day. After all these years of reading your articles, now I need your help. Three years ago, I finally married (at age 48) and added my wife’s name to the title to my home. I have owned the house since 1981 and it has greatly appreciated in market value since then. We sold it in October 2005. I presumed that by adding my wife’s name to the title I would get a new stepped-up basis to market value. However, when we recently had our 2005 income taxes prepared, we learned adding my wife’s name to the title did not step up the home’s basis. Although we were entitled to the $500,000 principal residence sale tax exemption, the net profit was about $610,000 so we owed capital gain tax on $110,000. Is this correct? –Brett W.
DEAR BRETT: Yes. Stepped-up basis only applies when there is a death and you inherit property. Adding your wife’s name to your home title did not create a new stepped-up basis for the home. Your tax adviser appears to have given you correct information.
DEPRECIATION EXPLAINED
DEAR BOB: For the past eight years, I have owned a condo at the beach that I rent to tenants. The rent income and expenses are reported on Schedule E of my tax returns. That is where my accountant deducts depreciation. If I sell the condo, how does depreciation catch up with me? Or, if I make a tax-deferred exchange, what happens to the depreciation deducted on my tax returns? –Janet J.
DEAR JANET: Depreciation is a non-cash tax deduction for estimated wear, tear, and obsolescence of business and investment property. Residential rental property must be depreciated over a 27.5-year estimated useful life. Land value is not depreciable because land never wears out.
When you sell a rental property on which you have been deducting depreciation, the total depreciation you deducted is “recaptured” (which means taxed) at a special federal tax rate of 25 percent. In addition, state income tax may apply.
However, if you instead make an Internal Revenue Code 1031 tax-deferred exchange for another business or investment property of equal or greater cost and equity, you avoid paying tax on both the deducted depreciationand the remainder of your capital gain. For full details, please consult your tax adviser.
READER SAVES $8,000 TAX ON SALE OF ADJOINING LOT
DEAR BOB: Thank you for your article last October explaining the sale of a vacant lot adjoining a principal residence can qualify for that Internal Revenue Code 121 tax exemption of $250,000 for a single or up to $500,000 for a married couple filing jointly. When we had our income taxes prepared, I showed that article to our tax preparer who was not aware of that tax break. But he verified it with the IRS. As a result, we avoided paying capital gains tax of about $8,000 on the sale of a lot adjoining our home. Many thanks. –John S.
DEAR JOHN: I’m always glad to hear happy results like yours. However, please be aware that Internal Revenue Code 121 allows the tax exemption on the sale of a vacant lot adjoining your principal residence only if you sell your home within two years before or after the sale of the lot.
If you haven’t already sold your home, it must be sold within 24 months after the lot sale otherwise you will owe that $8,000 tax, plus interest, from the lot sale.
INTERVIEW THREE, NOT JUST ONE, AGENTS BEFORE LISTING HOME
DEAR BOB: My home is worth over $700,000, many people tell me. The similar home across the street was recently refinanced and appraised at $769,000. But the real estate agent who expects to get my listing says my house is only worth only about $700,000. How do I get a reasonable appraisal of my home? –Mavis B.
DEAR MAVIS: Your situation is a classic example why home sellers should always interview at least three successful local real estate sales agents. The agent you consulted should have prepared for you a written comparative market analysis (CMA). This CMA form shows the agent’s estimate of your home’s market value based on (1) recent sales prices of similar nearby homes, (2) asking prices of neighborhood homes currently listed for sale (your competition), and (3) asking prices of recently expired comparable home listings.
Only after you have compared CMAs from at least three successful agents who sell homes in your vicinity can you decide, with the advice of your listing agent, the correct asking price for your home.
REALTY AGENT QUESTIONS ZILLOW.COM WEB SITE
DEAR BOB: You should retract your recommendation of www.Zillow.com. As a real estate agent, I find its estimates of home market values in my area are highly inaccurate. Some valuations are too high, others are way too low. That Web site is misleading to home buyers and sellers who think Zillow shows correct market values. –Betty R.
DEAR BETTY: I never recommended or endorsed the Zillow.com Web site. I only said it is another resource and I found it to be reasonably accurate for the properties I checked.
The unique aspect of Zillow is, for many of the 60 million residences in its database, it also shows global position system (GPS) aerial photos of the property, including the lot boundaries. I find this is amazing and a great way to discover what is located near the subject home.
You are correct Zillow is not 100 percent accurate. I found some of its recent comparable home sales prices are not truly comparable.
For example, I checked the house where I grew up in Edina, Minn. Zillow shows a current market value of approximately what I understand homes in that neighborhood are now worth. But it says I grew up in a one-bedroom, one-bathroom house. That sounds like a shack to me. The house is actually a very spacious three bedrooms with two bathrooms.
WHEN A GIFT TAX RETURN MUST BE FILED
DEAR BOB: A few weeks ago you mentioned a quitclaim deed to transfer title to real estate. Does transfer of title by quitclaim deed require both parties to file a Gift Tax Return with the IRS? –Roger B.
DEAR ROGER: No. Gifts below $12,000 each year per donor to each donee are exempt from federal gift tax. No gift tax return is required for gifts below $12,000. That means, for example, a husband and wife can give $12,000 each to a donee ($24,000 annual total) without having to file a gift tax return.
A donor must file a federal gift tax only if the net annual gift amount per donee is greater than $12,000. But no gift tax will be due unless the donor’s lifetime non-exempt gifts exceed $1 million.
Gift donors should be aware total non-exempt lifetime gifts are subtracted upon their death from their current $2 million federal estate tax exemption. For full details, please consult your tax adviser.
HOW TO FIND LOCAL REAL ESTATE INVESTOR CLUBS
DEAR BOB: Some time ago you mentioned real estate investors should attend local real estate investor club meetings to hear speakers and meet local real estate attorneys and tax advisers. How can I find such a club in my area? –Loretta S.
DEAR LORETTA: The best source for finding local investor clubs is www.creonline.com/clubs.htm.
The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” is available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 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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