DEAR BOB: My wife and I are both 85. We bought our house five years ago in an Internal Revenue Code 1031 tax-deferred exchange. It was our third 1031 exchange in a series so our cost basis is very low. We rented out the house for about three years and took it over as our home two years ago. Our plan was to sell it eventually and claim the $500,000 exemption to offset the capital gains tax we will owe on the 1031 deferred gains. However, I read in IRS Publication 17, “You cannot claim the exclusion if you acquired your home in a like-kind exchange.” Is there any legal way to get around this? –Don DeL.
DEAR DON: Yes. As you probably know, Internal Revenue Code 121 allows principal-residence sellers to qualify for up to $250,000 tax-free capital gains (up to $500,000 for a qualified married couple). To qualify, you must own and occupy the primary home at least 24 of the last 60 months before its sale. You and your wife appear to qualify. Only one spouse’s name need be on the title.
Purchase Bob Bruss reports online.
Effective Oct. 22, 2004, IRC 121 was amended to require a principal residence acquired in an IRC 1031 tax-deferred exchange to be held for at least five years to qualify for IRC 121. But only 24 months of owner-occupancy is required.
This tax law change was enacted to prevent investors from trading their investment property into a residential property, converting it to the owner’s principal residence, and quickly qualifying for up to $500,000 tax-free sales profits after only 24 months.
Now such a transaction requires at least five years of ownership including at least 24 months of owner-occupancy. However, depreciation you deducted will be taxed at the special 25 percent federal recapture tax rate. For full details, please consult your tax adviser.
WHAT IF HOME SELLER AND BUYER DISAGREE ON A DEFECT?
DEAR BOB: We sold our home in May 2006 and completed the seller’s disclosure form. The buyer had a professional inspector check the 8-year-old home. We repaired the few minor items he discovered. Now the buyer alleges we did not disclose that the patio ceiling under the open deck leaks. The patio has a vinyl ceiling under the open deck to divert rain water to the rear of the patio. Because this is the way the system was designed to function, we did not represent the area as a “dry porch.” The buyer claims he was misled and we failed to disclose this information. But we did not see this as a defect. The buyer has removed the vinyl ceiling and replaced it with a gutter system to provide for a dry porch. Now he wants us to pay and will take us to court if we don’t. What should we do? –Richard I.
DEAR RICHARD: When you are served with the court summons and complaint, be sure to answer it and then show up in court at the appointed date and time. Failure to answer could result in a default judgment against you.
If the amount in dispute is large, you should retain a real estate attorney. However, if the amount is not huge, I suggest you tell your story to the judge just like you stated it in the paragraph above.
From your description, you didn’t appear to do anything wrong. It sounds like your buyer is trying to get you to pay for an improvement he wanted. For more details, please consult a local real estate attorney.
IF DIVORCE DECREE IS SILENT, EX-SPOUSES STILL OWN THEIR HOUSE
DEAR BOB: A close friend got a divorce. But her name is still on the mortgage and the title to the house, which she and her ex-husband bought during the marriage. Although she has no interest in any of the belongings, does she still own half of the house? –Eddie P.
DEAR EDDIE: The exact answer depends on the wording of the divorce decree from the divorce court.
If nothing was said in that decree about the house, it appears she still owns half of the house and is still liable for the mortgage payments. She should consult her divorce attorney to clear up the details.
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 www.BobBruss.com or 1-800-736-1736. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
