DEAR BOB: My wife and I bought our first home in 1974 andhave moved up several times, deferring our profit taxes under the then-currenttax law. In 1995 we bought our present home and have kept careful track of ourbasis in the property dating back to our first home. Under the current tax law,does this matter? When we sell our residence, can we simply take the $500,000principal-residence-sale tax exemption based on our purchase price of thatresidence? –Ira C.
DEAR IRA: Congratulations on keeping excellent tax records.The now-repealed Internal Revenue Code 1034 “rollover residencereplacement rule” applies to all your deferred capital gains from yourprior principal-residence sales.
Purchase Bob Bruss reports online.
The easy way to estimate your capital gain on the sale ofyour current principal residence is to add up your deferred capital gain fromthe previous sales and then subtract that number from your current home’spurchase price.
Let’s suppose those deferred home-sale “rollover”gains were $20,000, $45,000 and $70,000 — for a total of $135,000. Justsubtract $135,000 in this example from the purchase price of the home purchasedin 1995.
Suppose you paid $300,000 for your present home. Subtractingyour $135,000 deferred gains from previous home sales in this example producesa $165,000 adjusted cost basis for your current home (although you paid$300,000 for it). To that number, add the cost of any capital improvements youmade during ownership.
If the difference between your adjusted cost basis ($165,000in this example) and your adjusted (net) sales price exceeds $500,000 for amarried couple filing a joint tax return — who owned and occupied theirprimary residence at least 24 of the last 60 months before the home sale –then you will owe capital gain tax. If the number is less than $500,000 (below$250,000 for a single home seller), then you won’t owe any capital gain tax.For full details, please consult your tax adviser.
REINVESTING HOME-SALE MONEY WON’T AVOID CAPITAL GAIN TAX
DEAR BOB: When I sell my house, can I reinvest in twodifferent properties to avoid the capital gains tax? Or does it have to be justone property? –Candice T.
DEAR CANDICE: Neither! When you sell your principalresidence, if you owned and occupied it at least 24 of the last 60 monthsbefore its sale, Internal Revenue Code 121 gives you a tax exemption up to$250,000 (up to $500,000 for a married couple who both meet the occupancytest). For full details, please consult your tax adviser.
SAME NAME MUST BE ON ALL TAX-DEFERRED-EXCHANGE PROPERTIES
DEAR BOB: I am in the process of selling a rental house Iown. I would like to purchase another property to avoid the capital gain tax onabout $70,000. Can I buy into a rental property currently owned by my daughterand son-in-law? They want to sell me half of that property –Richard F.
DEAR RICHARD: The answer is “no.” The reason isall properties in an Internal Revenue Code 1031 tax-deferred exchange must beheld in exactly the same names. Please consult your tax adviser for fulldetails.
The new Robert Bruss special report, “The 10 KeyQuestions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2007 Inman News