DEAR BOB: My wife and I bought our first home in 1974 and have moved up several times, deferring our profit taxes under the then-current tax law. In 1995 we bought our present home and have kept careful track of our basis in the property dating back to our first home. Under the current tax law, does this matter? When we sell our residence, can we simply take the $500,000 principal-residence-sale tax exemption based on our purchase price of that residence? –Ira C.
DEAR IRA: Congratulations on keeping excellent tax records. The now-repealed Internal Revenue Code 1034 “rollover residence replacement rule” applies to all your deferred capital gains from your prior principal-residence sales.
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The easy way to estimate your capital gain on the sale of your current principal residence is to add up your deferred capital gain from the previous sales and then subtract that number from your current home’s purchase price.
Let’s suppose those deferred home-sale “rollover” gains were $20,000, $45,000 and $70,000 — for a total of $135,000. Just subtract $135,000 in this example from the purchase price of the home purchased in 1995.
Suppose you paid $300,000 for your present home. Subtracting your $135,000 deferred gains from previous home sales in this example produces a $165,000 adjusted cost basis for your current home (although you paid $300,000 for it). To that number, add the cost of any capital improvements you made during ownership.
If the difference between your adjusted cost basis ($165,000 in this example) and your adjusted (net) sales price exceeds $500,000 for a married couple filing a joint tax return — who owned and occupied their primary residence at least 24 of the last 60 months before the home sale — then you will owe capital gain tax. If the number is less than $500,000 (below $250,000 for a single home seller), then you won’t owe any capital gain tax. For full details, please consult your tax adviser.
REINVESTING HOME-SALE MONEY WON’T AVOID CAPITAL GAIN TAX
DEAR BOB: When I sell my house, can I reinvest in two different properties to avoid the capital gains tax? Or does it have to be just one property? –Candice T.
DEAR CANDICE: Neither! When you sell your principal residence, if you owned and occupied it at least 24 of the last 60 months before its sale, Internal Revenue Code 121 gives you a tax exemption up to $250,000 (up to $500,000 for a married couple who both meet the occupancy test). For full details, please consult your tax adviser.
SAME NAME MUST BE ON ALL TAX-DEFERRED-EXCHANGE PROPERTIES
DEAR BOB: I am in the process of selling a rental house I own. I would like to purchase another property to avoid the capital gain tax on about $70,000. Can I buy into a rental property currently owned by my daughter and son-in-law? They want to sell me half of that property –Richard F.
DEAR RICHARD: The answer is “no.” The reason is all properties in an Internal Revenue Code 1031 tax-deferred exchange must be held in exactly the same names. Please consult your tax adviser for full details.
The new Robert Bruss special report, “The 10 Key Questions Smart Home Buyers Ask to Avoid Getting Ripped Off,” is now 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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