Key to avoid tax on sale of apartment building

DEAR BOB: My husband and I own a three-unit apartmentbuilding. We live in one of the apartments. We’re planning to sell and buy asingle-family house as our residence. What are the tax implications if we buy ahouse for more than what we sell the building for or if the new house costsless than the current building? –Jane D.

DEAR JANE: The purchase price of your personal residencehouse is irrelevant. You don’t need to buy another replacement principalresidence to avoid capital gains tax.

Purchase Bob Bruss reports online.

You can use the Internal Revenue Code 121 principalresidence sale tax exemption up to $250,000 (up to $500,000 for a qualifiedmarried couple filing a joint tax return) for the profit from the sale of yourpersonal residence apartment.

To determine this amount, before the building sale closes,you should obtain a professional appraisal to allocate the sales price betweenthe two rental apartments and your personal residence unit.

But the only way to avoid capital gain tax on the sale ofthe two rental apartments is to make an Internal Revenue Code 1031 tax-deferredexchange for another rental property of equal or greater cost and mortgage debt.

Thanks to Internal Revenue Procedure 2005-14 you can useboth IRC 121 and IRC 1031 for the same sale, such as your residence-rentalbuilding. For details, please consult your tax adviser.


DEAR BOB: My grandmother is 80. I have been paying her homeutilities, insurance, and property taxes. But I have not been able to deductthese expenses because I am not on the title to her home. She wants to sign thehouse over to my wife and me. What is the easiest way for her to gift the houseto us? Must a title company be involved? Will the stepped-up basis to marketvalue apply in this situation? –Tim F.??

DEAR TIM: The easy way to transfer property title is aquitclaim deed. Yes, you should buy an owner’s title insurance policy to becertain you receive marketable title.

But the bad news is, as a gift donee, you must take overyour grandmother’s presumably very low adjusted-cost basis.

The only way to obtain a stepped-up basis to market value isto inherit property. That means somebody has to die first.

A better approach might be for your grandmother to deed youa joint tenancy interest in the property so you can deduct the property taxesyou pay for her. Please consult your tax adviser for full details.


DEAR BOB: When we purchased our house, I signed a quitclaimdeed relinquishing my interest in the house to my wife. Now I want my name andco-ownership of the house back on the title. What should I–or my wife–do toaccomplish this? –Joseph N.

DEAR JOSEPH: Presuming you have been behaving well and arein good standing with your wife, she can sign a quitclaim deed giving you a 50percent interest in the house.

However, that deed should state how you wish to hold titletogether. I recommend holding title in a revocable living trust to 1) avoidprobate costs and delays when one of you dies, and 2) provide management if oneof you becomes incapacitated. Please consult a local real estate attorney fordetails on the best way to hold joint title.

More details are in my special report, “24 KeyQuestions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs andDelays,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA94010 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 2006 Inman News

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