DEAR BOB: Regarding the Internal Revenue Code 121 principalresidence sale tax exemption up to $250,000 (up to $500,000 for a marriedcouple), we own two houses for which we meet the 24-out-of-last-60-monthownership and occupancy requirement on both. One house is now listed for sale.When it sells, we would like to move into the other house and sell it withinthe next several months. If we sell one house in 2006 and the other house in2007, can we claim the IRC 121 exemptions on both houses? –Bonnie H.
DEAR BONNIE: No. But it sounds like you understand IRC 121quite well. To qualify for the principal residence sale tax exemption up to$250,000 (up to $500,000 for a married couple filing a joint tax return) youmust own and occupy the home at least 24 of the last 60 months before its sale.
Purchase Bob Bruss reports online.
However, this tax exemption can only be used once every 24months. When you sell one qualified house in 2006, then you can’t use the IRC121 exemption again on another home until at least 24 months later. For fulldetails, please consult your tax adviser.
MUST BOTH SPOUSES’ NAMES BE ON TITLE TO RESIDENCE?
DEAR BOB: My wife and I have lived in my house for more thanthe required 24 months to claim the Internal Revenue Code 121 tax exemption.But only my name is listed on the title as the owner. I owned the house beforewe married. Does her name need to be added to the title to make us eligible forthe $500,000 exemption? –Arnold S.
DEAR ARNOLD: No. There is a specific clause in IRC 121,which says that for a married couple, title to the principal residence can beheld in the name of one spouse alone but each spouse is entitled to a $250,000exemption if (1) the 24-month ownership and occupancy test within the last 60months before sale is met by each spouse, and (2) if they file a joint tax returnin the year of home sale. Please consult your tax adviser for more details.
PROBATE IS NECESSARY UNLESS TITLE IS IN JOINT TENANCY OR AREVOCABLE LIVING TRUST
DEAR BOB: My 82-year-old mother owns her modest home, whichis probably worth around $100,000. Title is in her name alone. I have showedher your articles about the benefits of holding title in a revocable livingtrust to avoid probate and in case she gets Alzheimer’s disease or a severestroke. But she is very stubborn and thinks because she has a small estate,worth less than $600,000, she doesn’t need a living trust or even a will. I amher only heir. As her health is declining, is there any other way to avoidprobate when she dies? I have heard horror stories about probate costs anddelays –Maurice H.
DEAR MAURICE: A few states have probate court exemptions forsmall estates but your mother doesn’t appear to qualify. I don’t know where the$600,000 amount came from, but there is no probate exemption for estates belowthat amount.
The two primary ways to avoid probate of estates are (1)hold real estate title in a joint tenancy with right of survivorship, or (2)hold title in a revocable living trust.
Especially since your mother doesn’t have a written will,after she dies probate court proceedings will be required to distribute theestate according to the state law of intestate succession where she lives. At aminimum, probate court proceedings take six months, often much longer. Moredetails are at my special Web site,
LOTS OF DISADVANTAGES TO HOME ON LEASED LAND
DEAR BOB: I am considering buying a manufactured home on aquarter-acre parcel in a retirement community. These homes are very nice andmuch less expensive than comparable “stick built” houses nearby. Thebig drawback my wife dislikes is they are located on leased land, and there isno option to purchase the lot. But the land lease extends for 49 years. I likethe adjoining golf course, nearby shopping, and low cost. Is the leased land aserious problem? –Henry R.
DEAR HENRY: Yes. Listen to your smart wife. Just as you arequestioning the advisability of buying a manufactured home on leased land, youcan be sure when you are ready to resell your buyers will also hesitate.
Presuming you can obtain a mortgage (some lenders refuse tolend on manufactured homes located on leased land), as the lease gets closer toits 49th year, your manufactured home will become worth less and less. Afterthe 49th year, its ownership will revert to the landowner.
You and your wife probably won’t be around in 49 years, butyour heirs won’t have much to inherit if only a few years remain on the landlease when you pass on. Other than the lower purchase price, nearby shoppingand golf course advantages, I see lots of disadvantages to that situation.
BUYING A HOME WILL INCREASE TAKE-HOME PAY
DEAR BOB: I am a single mom, with one son, getting ready tobuy my first home in June 2007. I am a schoolteacher claiming two withholdingexemptions on my W-4. But my real estate agent told me I could increase mywithholdings to increase my take-home pay to help me make the mortgage payments(which will be about $300 per month more than I now pay in rent). How soonbefore I actually buy in June should I do this? –Ms. B.Y.
DEAR MS. B.Y.: I suggest you wait to change your withholdingexemptions until after you file your 2006 income tax returns by April 15, 2007.Then you will have a better idea of your income tax situation.
You can probably increase your exemptions (thus lowering theamount of income tax withheld from each paycheck) by one or two to helpcompensate for your mortgage payment beginning in June 2007. For details,please consult your tax adviser.
IF YOU DON’T EXCHANGE, YOU WILL OWE TAX ON INCOME PROPERTYSALE
DEAR BOB: I live out-of-state but own a rental property nearSan Francisco. I want to sell this property and pay off my home mortgage. If Isell the rental property in 2006 or 2007 without doing an Internal Revenue Code1031 tax-deferred exchange (I don’t want to be a landlord any more), will I oweboth federal and California capital gains tax? Also, what would be theadvantage of waiting until 2008 when the tax law will allow for one year withno capital gains taxes? –Jill J.
DEAR JILL: Because the rental property is not your principalresidence, you will owe capital gains tax (currently at a 15 percent maximumfederal tax rate, plus applicable California tax). In addition, there is a special25 percent federal depreciation recapture tax rate. The fact you want to usethe sales proceeds to pay off your home mortgage is irrelevant.
There is no capital gain tax exemption if you wait to selluntil 2008. You are probably thinking of the federal estate tax exemption ifyou die in 2008. Unless Congress changes the estate tax law, for individualswho die in 2008 there will be no federal estate tax. Your tax adviser canprovide more details.
CLEAR YOUR TITLE NOW OF DECEASED JOINT TENANT’S NAME
DEAR BOB: My mother and I owned a house together as jointtenants with right of survivorship. She died about eight years ago. But hername is still on the title. Will that prevent me from selling the house?–Craig S.
DEAR CRAIG: Temporarily, yes. In most states, when one jointtenant with right of survivorship dies, all that is required to clear the titleis for the surviving joint tenant to record a certified copy of the deathcertificate and an affidavit of survivorship.
This should be taken care of as soon as possible after ajoint tenant’s death. Until you clear the title, you can’t convey marketabletitle. For details, please check with the local recorder of deeds where theproperty is located.
GOOD LUCK GETTING REFUND OF TAX LIEN PAID
DEAR BOB: My wife and I bought our home from my father in2004. In 2005, we refinanced the mortgage. There was a lien against the titlefor my father’s income taxes. At the mortgage refinance closing, the attorneytold us we must pay the $1,808 tax lien although my father owed it. I havesince learned the attorney should have handled it differently by putting the$1,808 into escrow until the tax collector was made aware of the mistake. Whatare our options to get the $1,808 refunded? –Levin L.
DEAR LEVIN: If the recorded income tax lien had not beenpaid, title was not marketable and a lender’s title insurance policy would nothave been issued.
You can apply for a refund of the alleged erroneously paidtax. But it is usually very difficult to get a tax refund from any governmentagency. My suggestion is ask your father to pay you the $1,808 income tax heowed so you can forget it.
The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News