Real estate ownership doesn’t guarantee tax break

DEAR BOB: About nine years ago, my parents helped me buy myfirst home, a condominium. All three of us took title as joint tenants withright of survivorship. Due to a superb location and great management, it turnedout to be an outstanding investment. I got married about five years ago andmoved into a house with my bride. My parents moved into the condo. Mom died in2002. Dad still lives there. He and I have decided to sell the condo to pay forhis care in an assisted-living residence. The net profit will be around$400,000. Because he owned and occupied the condo 24 of the 60 months beforeits sale, he qualifies for the $250,000 principal residence sale tax exemption.However, my tax adviser says I can’t qualify because I don’t meet the occupancytest. Do you agree or disagree? –Troy W.

DEAR TROY: Your tax adviser is correct. Internal RevenueCode 121 says that to qualify for the principal residence sale tax exemption upto $250,000 per owner, you must own and occupy it at least 24 of the 60 monthsbefore its sale. For a married couple, only one spouse need be on the title,but both spouses must meet the occupancy tax and file a joint tax return toqualify.

Purchase Bob Bruss reports online.

Although your dad qualifies for up to $250,000 tax-freeprofits, you can’t qualify because you don’t meet the 24 out of last 60 monthsoccupancy test. Therefore, about $150,000 of that capital gain will be taxable.


DEAR BOB: At age 73, I recently refinanced my reversemortgage. Since then I am being bombarded with letters from insurance companieswanting to sell me disability insurance. I am infuriated by these companiesinvading my privacy. Also, the appraiser came from an area a considerabledistance away. How can he know property values in my town? The reverse mortgagelender didn’t use one local company, except the termite inspector. The lender’stitle insurance came from out of state. What can be done about this invasion ofmy privacy? –Marilyn G.

DEAR MARILYN: Most recorded documents are publicinformation. The reason is many people, such as mortgage lenders and titleinsurers, need to know what liens and other recorded documents affect yourproperty.

There are nationwide companies that make “bigbucks” obtaining recent public records, such as your reverse mortgagerecording, and selling that information to insurance companies and other users.Because public records are not private, there is nothing you can do but throwaway the junk mail you don’t want.


DEAR BOB: Thanks for that item a few weeks ago from aRealtor who got her seller to raise the sales commission to 7 percent and thensold the house that had languished on the market. As my home is listed forsale, I showed that article to my Realtor. I think he is doing a great job, butthe local “buyer’s market” is saturated with too many homes in myprice range. My listing has about 40 days remaining so I said “Let’s raisethe commission to 7 percent with 4 percent to the buyer’s agent.” Hethought I was crazy, but I convinced him I really need to sell my house. So heand his broker heavily promoted my house to the local MLS (multiple listingservice) agents with a re-tour, deli-lunch (Realtors love free food), weekendopen houses, newspaper ads, etc. Within 10 days, I received two good purchaseoffers. I accepted the best one and kept the other as a back up. Just thoughtyou should know raising the commission really works –Cindy R.

DEAR CINDY: That item a few weeks ago resulted in manypositive letters from realty agents. But there were a few negative letters frompenny-pincher cheapskate home sellers who said “Why didn’t the Realtorwork as hard when the house had a 6 percent commission?”

They didn’t understand the purpose of raising the salescommission is to attract the attention of buyer’s agents to get them to showyour home rather than another one to their prospects. In the current buyer’smarket, the success key is getting your home seen by as many buyer’s agents andtheir prospects as possible.


DEAR BOB: I am perplexed at your answer to stepchildrenwhose stepmother holds a life estate in their late father’s property. If thestepchildren will inherit the house after the stepmother dies, shouldn’t theyhelp pay for its upkeep? Most widows live on fixed incomes and often can’tafford to maintain the property. I think you need to think this through fromthe perspective of the second wife who probably took care of the ill father.Why should she spend her money for her stepchildren’s inheritance? –Muriel O.

DEAR MURIEL: You make a lot of sense. However, the law ofevery state with which I am familiar says a life tenant must pay the propertytaxes, mortgage payments (if any), and the maintenance.

The remainderman has no legal duty to help pay formaintenance. If the life tenant allows the property to go to “waste,”the remainderman can have the life estate terminated.

But there is no reason why the terms of the life estatecould not require contributions by the remainderman to help maintain the homewhile the life tenant lives in it. Such a document should be carefully drawn toprevent administrative problems.


DEAR BOB: My niece wants to buy my house without getting amortgage. She wants me to sign the house over to her. Then she will get itrefinanced and pay me my asking price. I will continue living in the housewhile this plan is pending and I will get my money in three months if all goeswell. If not, she will deed the house back to me. Is this risky or just plaindumb? I am a widow and the house is too much for me to keep up –Valerie J.

DEAR VALERIE: This could be a family scam. If your niece canqualify for a mortgage, she should do so without you first deeding the house toher.

You could agree, for example, to sell the house to her withan 80 percent lender mortgage and you can carry back a second mortgage for thebalance of the sales price.

There’s no advantage for you to deed your house to yourniece without receiving cash or at least a first mortgage from her for yoursecurity. Please consult a local real estate attorney to get everything inwriting. Somehow, I just don’t trust that niece.


DEAR BOB: Why don’t you warn people about the dangers ofgift deeds? My mother was diagnosed with terminal cancer. I am her onlyoffspring. She wanted to gift deed her house and two rental properties to me toavoid probate after her death. Her attorney prepared the gift deeds and Irecorded them. Little did I know how costly that would be. A few months later Ireceived notices from the county tax assessor that the properties would bereassessed. At the very least, this will result in several thousand dollarshigher annual property tax. But the bigger surprise is the cancer diagnosis waswrong. My mother has another disease (the name is too hard for me to remember)but it now looks like she will live for many years. Even if I deed theproperties back to her, the tax assessor says he will still reassess them–Todd W.

DEAR TODD: You left out a much greater disadvantage of alifetime gift deed. Because you received those properties as lifetime gifts,you took over your mother’s low adjusted cost basis. If you had insteadinherited those properties, you would have received a new “stepped-upbasis” to market value on the date your mother passes on.

When you eventually sell those properties you will have alarge taxable capital gain most of which could have been avoided by insteadinheriting those properties.

Your mother meant well to avoid probate, but she could havekept ownership, given you a stepped-up basis, and avoided probate by use of aliving trust. Details are in my special report “24 Key Questions: LivingTrust Secrets Reveal How to Avoid Probate Costs and Delays” 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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