Confused about tax-deferred exchange

DEAR BOB: I own a two-family rental duplex and asingle-family rental house. I want to sell the duplex and pay off some of themortgage balance on the rental house. Under Internal Revenue Code 1031, can Iinvest the proceeds of the rental duplex sale to pay down the mortgage on therental house without owing capital gain tax? –Simon B.

DEAR SIMON: No. Sale of the rental duplex and using thesales proceeds to pay down the mortgage balance on your already-owned rentalhouse will not qualify as a tax-deferred exchange.

Purchase Bob Bruss reports online.

To make an IRC 1031 tax-deferred trade, you must sellproperty held for investment or use in a trade or business, such as that rentalduplex, and acquire a replacement investment or business property of equal orgreater cost within the specified time limits. Your tax adviser has furtherdetails.


DEAR BOB: My older sister owns a house in California. Butshe has German citizenship and lives in Berlin. When she decides to sell thehouse, how can she avoid paying tax on the large capital gain? If she adds myname to the title (I am a U.S. citizen), will this help her for the $250,000home-sale tax exemption? –Kim H.

DEAR KIM: The fact your sister is not a U.S. citizen doesnot disqualify her from claiming the Internal Revenue Code 121principal-residence-sale tax exemption up to $250,000 (up to $500,000 for aqualified married couple). Foreigners are welcome to pay taxes here and to useapplicable U.S. tax exemptions.

What currently disqualifies her is the fact she is notoccupying that California house as her principal residence. To qualify for theIRC 121 tax exemption, she must own and occupy that house as her primaryresidence at least 24 of the last 60 months before its sale.

Adding your name to the title won’t help because you have noentitlement to the capital gain.

Unless your sister qualifies for IRC 121 by meeting theownership and occupancy tests, when she sells that house her capital gain willbe fully taxable. She should consult her U.S. tax adviser before selling.


DEAR BOB: I bought my house in December 2005, financing 100percent of the purchase price with two mortgages. The house has been nothingbut trouble. It was built in 1985. The so-called professional home inspectorfailed to point out the water heater was original and the attic air conditionerinstalled in 2003 was improperly installed, causing ceiling damage. What are mychances of unloading this house without losing my shirt? Property values in myarea are holding steady. –Carey A.

DEAR CAREY: Your problems don’t sound too serious. I presumeyou have replaced the 20-year-old water heater and corrected the problem withthe air conditioner.

It is virtually impossible to resell any house at abreak-even price after only a year’s ownership without losing money afterconsidering the sales costs such as realty sales commission and transferexpenses.

Why sell? This current “buyer’s market” in mostcities is not a good time to sell unless you have a highly motivating reason,such as an out-of-town job transfer. Make the best of your zero-down mortgagefinancing and wait to sell until you have built up some equity by paying downthe mortgage balances.

Even in the best of real estate times, it takes three tofive years of home ownership to at least break even when selling. That’s whyhome buyers should not purchase unless they plan to stay at least five years.

The new Robert Bruss special report, “2007 Realty TaxTips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,”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 Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2007 Inman News

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