DEAR BOB: I am buying my first home in the next couple ofmonths from my aunt and mother. They’re inheriting my grandmother’s home, butneither of them wants to keep it. What is the best way to go about this familypurchase? –James M.
DEAR JAMES: Your aunt and mother first need to obtainmarketable title from your grandmother’s estate. This is very important. Thereason is their adjusted cost basis is the home’s market value on the date ofgrandmother’s death.
Purchase Bob Bruss reports online.
If they sell the house to you shortly thereafter, for thesame market value, they will owe zero capital gains tax.
Of course, as a prudent buyer, be sure a reputable realestate attorney or title company handles your purchase and you obtain anowner’s title insurance policy showing you acquired marketable title.
If the house is free and clear with no mortgage to be paidoff, you might ask your aunt and mother if they would like to finance yourmortgage so you don’t have to obtain a mortgage from an outside lender.
Because they know, trust and love you, they are likely tosay “yes.” Offer them a fair interest rate, which is perhaps 6percent in today’s market. That’s a great investment for them and easyfinancing for you.
By carrying back the mortgage for you, they will be creatingexcellent mortgage interest income for themselves, secured by the house. If youdefault, they can foreclose and get the house back to sell to someone else.
GET A PROFESSIONAL APPRAISAL FOR A DIVORCE BUY-OUT
DEAR BOB: My husband and I own a house worth about $375,000.It has a water seepage problem. We are in the process of a divorce and want tosell the home in the early spring. We are trying to fix the water problembefore then. But I am hoping to buy him out. How should I go about doing this?–Marian R.
DEAR MARIAN: Sorry, I can’t help you with that water seepageproblem. But divorce buy-outs by one spouse are very common. The first step isto get a professional appraisal of the house so you both can agree on thehome’s fair market value.
Be sure both parties agree on the selection of theappraiser. If that’s not possible, an alternative is for each spouse to hirehis/her own licensed appraiser and then average the two appraisals to arrive ata fair market value.
As for financing your buy-out of your husband’s share of theproperty, this is usually done by refinancing the mortgage (unless you havelots of spare cash!).
When agreeing on the buy-out amount, don’t forget to reducethe home’s market value by the amount of selling expenses that will be saved,such as the realty sales commission and transfer costs. Be sure your divorceattorneys review and approve the buy-out agreement.
TAX-DEFERRED EXCHANGE DOESN’T APPLY TO PERSONAL RESIDENCE
DEAR BOB: Within the next year, I want to sell my home andmove to a better climate. But my problem is I am single so I only will have a$250,000 tax-exemption. However, my estimated home sales price will be around$425,000. Can I use one of those tax-deferred exchanges you write about toavoid tax? –Carl T.
DEAR CARL: A tax-deferred exchange is appropriate for rentalproperties. But that is not your situation.
You left out a key fact. What is your adjusted cost basisfor the home?
That is usually your purchase price, plus most closing costsyou didn’t deduct in the year of purchase, plus capital improvement costs,minus any depreciation deducted, such as for business use of your home.Subtract your home’s adjusted cost basis from the net (adjusted) sales price toarrive at your capital gain.
For example, suppose $125,000 is your home’s adjusted costbasis and $400,000 is your net adjusted sales price after subtracting sellingcosts. The result is a $275,000 long-term capital gain (presuming you owned andoccupied your home at least 24 of the last 60 months before its sale).
Applying your $250,000 principal-residence-sale taxexemption, thanks to Internal Revenue Code 121, means you have only a $25,000 taxablecapital gain. At the current federal 15 percent maximum capital gain tax, plusapplicable state tax, that’s a genuine bargain. For more details, pleaseconsult your tax adviser.
The new Robert Bruss special report, “When It’s Smartto Prepay or Refinance Your Mortgage,” is now available for $5 from RobertBruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736or instant Internet delivery at www.BobBruss.com.Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2007 Inman News