New real estate rule thwarts investor’s tax strategy

DEAR BOB: I bought a rental property in 1991, which I soldfor $450,000. To avoid capital gain tax, I used an Internal Revenue Code 1031tax-deferred exchange to buy another rental property for $450,000. Afterrenting it for 12 months, I moved in and have lived in it for 24 months. If Isell this property at the same $450,000 price, will I owe any capital gain taxsince I made no profit? Is this a good way to avoid capital gain tax? –Sim Y.

DEAR SIM: Nice try! But Uncle Sam is way ahead of you.

Your adjusted-cost basis for the $450,000 rental house youacquired in an Internal Revenue Code 1031 tax-deferred exchange was not$450,000.

Purchase Bob Bruss reports online.

Instead, it was your $450,000 purchase price minus thedeferred capital gain on your old rental property minus the depreciation youdeducted on the acquired property during the 12-month rental period before youmoved in to make it your principal residence.

Although you owned and occupied the acquired property asyour principal residence for the last 24 months, if you wish to claim theInternal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for amarried couple filing jointly) you must own the acquired property at least 60months before sale.

I hate to break the bad news, but the depreciation youdeducted will be taxed at the special 25 percent federal “depreciationrecapture” tax rate when you sell your current property. For full details,please consult your tax adviser.

HOME SELLER RENT-BACK MUST BE REPORTED ON TAX RETURNS

DEAR BOB: We recently bought a house and let the sellersrent it back for a month for which they paid us rent. Does this rent-back countas rental income on our income tax return? Does having them live in our houseaffect deducting mortgage interest for that month? –Robert R.

DEAR ROBERT: Your mortgage interest and property taxes arealways tax-deductible.

However, the rent you received, because the rental termexceeded 14 days, must be reported on Schedule E of your federal income taxreturn where you can also deduct the applicable expenses for the rental period.Your tax adviser can give you more details.

LIFE ESTATE DOESN’T HAVE MUCH VALUE

DEAR BOB: My husband died about two years ago. He left me alife estate in his house. I am 68, but I want to move to Georgia to be near mychildren and grandkids. A neighbor offered me $1,000 for my life estate. Isn’tit worth much more than that since I am in excellent health and my familymembers live into their 80s and 90s? –Maida T.

DEAR MAIDA: Please read the exact terms of your lifeestate. Some life estates specify that if the life tenant permanently movesout, the life estate terminates. That means your life estate becomes worthlesswhen you move out of the house.

However, if your life estate doesn’t terminate until youdie, you can sell your life estate interest to the neighbor so he can rent oroccupy the house. But that buyer shouldn’t pay very much because when you die,the life estate terminates.

Although you say your family members live into their 80s and90s, you could get hit by a truck while crossing the street, thus terminatingyour life estate in the house. For full details, please consult a local realestate attorney.

The new Robert Bruss special report, “How to Sell YourHouse or Condo for Top Dollar With or Without a Real Estate Agent,” 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 www.BobBruss.com. 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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