Real estate inheritor fears hefty federal tax

DEAR BOB: Before my father died this year, he deeded hishouse into his living trust, of which my sister and I are successor trustees.His will stipulates that all his property and assets be divided equally amongsthis four children (me, my sister and two brothers). We are getting the houseready to sell and expect to net more than $400,000. His original purchase pricewas $36,000, with no major improvements since then. Because he was single atthe time of his death, does his estate owe tax on the profit exceeding$250,000? –Randall G.

DEAR RANDALL: No. Unless your late father left a net estateexceeding the current $2 million federal estate-tax exemption, no federalestate tax will be due. The $250,000 principal residence sale tax exemption ofInternal Revenue Code 121 applies only to home sales during the seller’slifetime.

Purchase Bob Bruss reports online.

However, you said your dad’s will leaves his assets to thefour siblings. But his will has nothing to do with his living trust, whichshould specify who receives the living-trust assets after his demise.

Depending on the state law where your dad was a resident,there might be an inheritance tax on the heirs. Fortunately, only a few statesstill have old-fashioned inheritance taxes on heirs, but there are usuallygenerous exemptions for close-relative heirs, such as spouse, children andparents.

Congratulations to your late father for wisely transferringtitle into his living trust so the home can be sold and the proceedsdistributed without any probate court delays or extra costs. For more details,please consult a probate attorney in the state where your father was aresident.


DEAR BOB: My husband and I (ages 73 and 83) have a lot ofequity tied up in our home of 40 years. Because we will probably need money inthe near future for living expenses, I’ve been trying to convince my husband tolook into a reverse mortgage. But he tells me your articles advise notobtaining one unless the homeowners plan to stay in their home at least fiveyears. Therefore, he is reluctant to consider a reverse mortgage because wedon’t need the money yet. My idea is to take out a reverse mortgage now,deposit 25 percent in a liquid account to draw on if needed and invest 75percent in an insured account with high interest. Is this a good plan? –LornaK.

DEAR LORNA: No. If you don’t need the reverse mortgage moneyyet, I see no reason to obtain one now and start accruing interest on money youreally don’t need. However, this is a good time to shop among reverse mortgagelenders to compare the FHA, Fannie Mae and Financial Freedom Plans. You canchoose to receive lump sum, lifetime income, credit line (except in Texas), orany combination of payments.

If you want to arrange a reverse mortgage now, the mostpopular choice credit line alternative makes funds available when you need themin the future, such as for a new roof or a trip around the world.

However, although interest doesn’t accrue until you startusing the money, not using the available money is an expensive choice becauseyour up-front loan fee costs start accruing interest whether you use any fundsor not. More details are in my special report, “The Whole Truth AboutReverse Mortgages for Senior Citizen Homeowners,” available for $5 fromRobert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at


DEAR BOB: My husband and I were seriously consideringrefinancing our home loan. The mortgage broker asked if we wanted to “lockin the rate,” and my husband said “yes.” The very next day,after much thought, we realized the closing costs were too high and it isn’tsmart to proceed because we plan to move within a year. I immediately phonedthe mortgage broker and told him not to proceed (I confirmed this by e-mailtoo). The broker continued to phone and left messages that turned nasty when hesaid a “denied letter” was going on our credit report because wewithdrew our application. But we never signed anything and we never finalized theloan product we wanted. But a “good faith estimate” statement wasmailed to us. Can this mortgage broker make our credit score lower? –StephanieN.

DEAR STEPHANIE: No. If you didn’t submit a signed loanapplication and didn’t give the mortgage broker permission to proceed, he hadno legal right to access your credit reports. Congratulations on backing out ofthat refinance if you plan to sell within 12 months. It would be a total wasteof costs for you to refinance now.

That mortgage broker is trying to intimidate you. Even ifyou had applied in writing for a mortgage that was denied, it wouldn’t show upon your credit reports other than as a credit inquiry.

If that bad mortgage broker gives you any further hassle,you should report the matter to the state regulator of mortgage brokers. Besure to check your credit reports in about 30 days at to verify your FICO score andto be sure there are no errors on your credit reports.


DEAR BOB: My wife and I own two rental houses. Our goal isto reduce the mortgage balance on our principal residence. Is there any way wecan sell the two rental houses and use the cash received to pay down our homeloan without owing capital gains tax on our sale profits? –Mark J.

DEAR MARK: Sorry, there is no way to sell your rental housesand avoid paying capital gain tax on your profit although you want to use thecash to pay down your home mortgage balance. Fortunately, the federal long-termcapital gain tax is currently only a 15 percent maximum, plus any applicablestate tax where the rental property is located. For more details, pleaseconsult your tax adviser.


DEAR BOB: We own two homes where we spend about six monthsevery year in each one. We want to sell our Florida home. But we file ourincome tax returns from our other home, vote there, etc. Must we change ourlegal domicile to Florida and file income tax returns from Florida in the yearbefore we sell so we can claim up to $500,000 tax-free profits? –Diane W.

DEAR DIANE: Internal Revenue Code 121 says you qualify forup to $250,000 (up to $500,000 for a married couple filing a joint tax return)tax-free principal residence sale profits if you own and occupy the home atleast 24 of the 60 months before its sale.

As you discovered, both your homes meet the occupancy testsince you spend about six months every year living in each one. But occupancytime alone doesn’t determine your principal residence.

However, if you don’t vote, hold driver’s licenses, registeryour automobile, file income tax returns, have bank accounts, etc., in Floridaand you are audited by the IRS, your Florida home will probably be determined notto be your principal residence.

Just filing your income tax returns from Florida in the yearof the sale and the previous year might not be sufficient, especially if youdidn’t record a Florida homestead. Check with your tax adviser for fulldetails.


DEAR BOB: We signed a listing contract to sell our home.While going through our papers, we found we were missing the listing agreement.We went to the broker’s office to get the missing paper and found it contains a$695 “transaction fee” plus the sales commission. We do not believewe signed the agreement with that fee on it. Nothing about this fee wasmentioned until we saw it on the listing agreement. Do we have any recourse?–Virginia F.

DEAR VIRGINIA: Shame on your listing agent for (1) notcalling your attention to that extremely high $695 unnecessary transaction”junk” fee, on top of your sales commission, before you signed thelisting and (2) not giving you a copy of the listing at the time you signed it.

Most states require the seller immediately be given a copyof the listing. You might want to report the matter to the state real estatecommissioner for investigation and possible licensee discipline.

If I were in your shoes, I would be so disgusted with thatlisting agent I would immediately cancel the listing for misrepresentation.

The new Robert Bruss special report, “Pros and Cons ofToday’s Five Best Real Estate Profit Opportunities,” is now available for$5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 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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