Gifting real estate may escape taxation

DEAR BOB: My son and his wife live in a free-and-clear houseI own. He pays utilities and maintains the property. He proposes I add boththeir names to the title so that in 24 months we can sell the property and hewould then purchase in his name only a more expensive home. My son says no taxwill be due on such a sale under that $500,000 tax exemption rule you oftendiscuss and the sale isn’t even reportable to the Internal Revenue Service. Irealize I would be passing on the value of the home to him but I am notconfident of the tax situation. Is he correct? –James S.

DEAR JAMES: When you gift the house to your son and hiswife, that event requires you to file a federal gift tax return. However, nogift tax will be due if your total lifetime gifts exceeding the annual $12,000per gift per donee exemption are not more than $1 million.

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When you pass on, the value of your gift will be subtractedfrom your federal estate tax exemption, which is currently $2 million if youdie in 2006.

As donees, your son and his wife will take over yourpresumably very low adjusted cost basis for the house. If they own and live inthe home as their principal residence at least 24 of the 60 months before itssale, Internal Revenue Code 121 allows them to exclude up to $500,000 capitalgains (up to $250,000 for a single homeowner) from tax upon sale.

Your son seems to be very sharp about the tax benefits ofhis acquiring ownership in the house. But before making any title transfer,please consult your personal tax adviser so you are fully aware of the taxconsequences.


DEAR BOB: In late April we listed our home for sale. Becausetwo very good friends are real estate brokers, we signed a joint listing withboth of them. Little did we know they hate each other’s guts and speak to eachother only when absolutely necessary. It is a six-month listing. Although wewere assured we listed at the correct asking price, we haven’t received anypurchase offers or serious buyer interest so far. Since these agents work atdifferent brokerages, neither one will hold a Sunday open house or evenadvertise our listing in the newspapers. What should we do? We already lost twogood friends –Brooke W.

DEAR BROOKE: Joint listings with two competitive real estateagents rarely are successful, especially when each agent works at a competingbrokerage. Those co-listing agents weren’t really your friends if they can’tget along to get your home sold for top dollar.

I am not surprised they refuse to cooperate on jointadvertising or to hold weekend open houses. Each co-listing agent is probablyworried the other listing agent will find an acceptable buyer and earn most ofthe sales commission.

But shame on you for signing a long six-month listing. Asregular readers of this column know, a 90-day listing is the maximum suggestedterm to keep your listing agent highly motivated to find a buyer.

At this point, I suggest you ask the co-listing agents, andyour former friends, to terminate their listing so you can re-list with anotheragent. Be sure to emphasize to each agent if they have a buyer for your home,they can still earn half of the sales commission. In the future, never sign alisting exceeding 90 days, especially with friends.


DEAR BOB: We bought our home in February 2005. At that time,my husband had just accepted a new job and we expected to stay at least fiveyears, maybe “forever.” However, his employer filed Chapter 11bankruptcy reorganization a few months ago. Although he still has a job, thingslook “dicey.” Meanwhile, word got around his industry and he recentlyreceived a superb unsolicited job offer at a much higher guaranteed salary forfive years, plus moving benefits, bonus, etc. Our only problem is if we sellafter less than 24 months of home ownership, we will owe capital gains tax on thetremendous increase in market value of our home. I recall you wrote about”unforeseen circumstances” as a reason the IRS grants partialprincipal residence sale tax exemptions. Would this qualify? –Jeanie T.

DEAR JEANIE: Yes. Your circumstance probably qualifies underthe Internal Revenue Code 121 principal residence sale partial exemption forboth job transfer and unforeseen circumstances. Using this exemption, whenselling a principal residence after less than 24 months of ownership andoccupancy, the sellers are entitled to a partial exemption based on the numberof occupancy months.

For example, suppose you owned your principal residence andyou qualify for one of the partial exemption rules for home sale (healthreasons, employment change, or unforeseen circumstances). Then your exemptionis based on the number of ownership months and occupancy.

If you sell after 20 months, that means you qualify for20-24ths or about 83 percent of the $250,000 exemption ($500,000 for a marriedcouple filing jointly. For full details, please consult your tax adviser.

The new Robert Bruss special report, “Probate PropertyProfit Secrets Revealed,” is now available for $5 from Robert Bruss, 251Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instantInternet delivery at for this column are welcome at either address.

Copyright 2006 Inman News

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