Legal loophole may let widow sell home tax-free

DEAR BOB: My mother-in-law was recently widowed at age 60.She is considering a move from her primary residence. She will owe capital gaintax on the sale and wishes to eliminate such tax. Could she move out of thehome, rent it for a brief while, and then do an Internal Revenue Code 1031tax-deferred exchange without incurring tax on the eventual sale? We arefamiliar with the Internal Revenue Code 121 use test for 24 of the 60 monthsbefore the sale, but how long must a home be rented before it qualifies for anIRC 1031 tax-deferred exchange? –Joe C.

DEAR JOE: Your mother-in-law should consult her tax adviserto determine her adjusted cost basis for her home. Depending on the state wherethe house is located, if her late husband held a full or partial title to thehouse, by inheritance she probably received a 50 percent or 100 percent newstepped-up basis to market value on the date of his death.

Purchase Bob Bruss reports online.

The result could be she has little or no taxable capitalgain if she decides to sell her primary home. Any capital gain can probably beavoided by the IRC 121 principal-residence-sale tax exemption up to $250,000 ifshe meets the last-24-out-of-60-month occupancy test before the sale.

It may not be necessary to rent the house to tenants and doan IRC 1031 tax-deferred exchange for another rental property of equal orgreater cost and equity (unless that’s what she really wants to do of course).IRC 1031 has no minimum rental time, but most tax advisers suggest at least sixto 12 months before exchanging.


DEAR BOB: A probate attorney recently notified me that Iinherited a vacant lot in a small town in Illinois. It seems my late uncle, whowas very “strange,” had given the attorney a quitclaim deed with myname on it to be delivered only after my uncle’s death. The attorney warned methere are about $3,600 of unpaid property taxes on the lot, but other than thatit is free and clear. I seem to recall you said something about deeds deliveredafter the owner’s death might be worthless. I’m thinking the lot must be worthmore than the $3,600 property taxes I would have to pay. What should I do?–Betty W.

DEAR BETTY: That quitclaim deed might be perfectly valid. Orit could be worthless if there are other claims against that lot’s title oragainst your late uncle’s estate.

The general rule is a deed delivered after the grantor’sdeath is not valid. However, there is an exception if the deed was delivered toa trustee, such as that probate attorney, during the grantor’s lifetime.

You don’t have to accept the title and can renounce it ifyou don’t want the lot, subject to its unpaid property taxes and possible otherliens.

I suggest you contact a title attorney or title company inthe small town to see if the lot’s title is marketable and if you can obtain anowner’s title policy. If the quitclaim deed is valid, then you can decide ifyou want to accept or reject that lot.


DEAR BOB: My daughter is selling her second home, which myprimary residence. She has never lived in the house. Its sale will net herabout $120,000. Can she buy another house of lesser value with the profits togive to me as a gift and pay tax on the remainder of her profit? She has nevertaken depreciation deductions on this house because she always reported themortgage interest and property tax deduction on schedule A of her income taxes–Sandra P.

DEAR SANDRA: Your daughter should consult her personal taxadviser. From your description, since the house was not her primary residence,she will owe capital gain tax on the entire $120,000 profit. If she wants togive you a gift of part of that money, that will have no effect on her taxsituation, as she still owes tax on her entire capital gain.

Since your name is not on the title, you are not entitled toa $250,000 principal-residence sale-tax exemption either.

If you were paying rent to your daughter and if she failedto report it on Schedule E of her tax returns, she may have a big tax problemfor unreported rental income and for her failure to deduct depreciation on therental house. The depreciation she should have claimed may be subject to thespecial 25 percent federal depreciation “recapture” tax rate.

The new Robert Bruss special report, “Five Easy Ways toBuy Your Home and Investment Property for Nothing Down,” is now availablefor $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit cardat 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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