How renting home each year impacts home-sale tax break

DEAR BOB: I sold my principal residence and moved into myvacation home, which is now my permanent principal residence. However, I go toFlorida four weeks each winter. During that time, I rent my home out for alittle extra income. When I decide to sell, will that four-week annual rentalperiod prevent me from claiming the house as my principal residence for the$250,000 tax-free exemption? –Dianna S.

DEAR DIANNA: No. Your short-term, four-week annual rentaldoesn’t prevent you from selling your principal residence and claiming your$250,000 tax-free exemption, as allowed by Internal Revenue Code 121.

Purchase Bob Bruss reports online.

Of course, that presumes you own and occupy it as yourprimary home at least 24 of the last 60 months before the sale. Also, youcannot use IRC 121 more frequently than once every 24 months. For more details,please consult your tax adviser.


DEAR BOB: I am a new landlord who is receiving conflictingadvice. I have been attending the monthly meetings of a local real estateinvestor’s club where I am learning about property management and having lotsof fun meeting fellow landlords. But I am receiving conflicting advice. Sometell me I should collect the first and last month’s rent from a new tenant,plus a security deposit. But two old-time landlords told me they collect a bigsecurity deposit and the first month’s rent before the tenant moves in. Whichis best? –Betsy S.

DEAR BETSY: State and local law determine any restrictionson collecting up-front security deposits and last month’s rent.

For example, where I live I am limited to collecting asecurity deposit that does not exceed two times the monthly rent. Frankly, I’venever been able to get a new tenant to pay that large a security depositanyway.

Even if collecting the first and last month’s rent at thetime of renting a house or apartment is allowed where your property is located,I suggest you do not do that. The primary reason is rents will graduallyincrease over the years and if your tenant stays many years, when the tenantmoves out you must then accept as full payment the already-paid low lastmonth’s rent.

A better alternative is to collect a large up-front securitydeposit, plus the first month’s rent, before the tenant moves in. My experienceis the larger the refundable security deposit, the greater the probability Iwill receive the rental back in excellent condition when the tenant moves out.

If the tenant only has a small deposit at risk, chances arethe property won’t be in superb condition when the tenant vacates. Also, asecurity deposit can be used for any allowable purpose, such as repairingtenant damage or paying unpaid rent, whereas if you collect the last month’srent in advance it can be used only for that purpose.


DEAR BOB: My elderly mother in her 60s owns some valuableland, which a developer wants to buy. He offered her an excellent price.However, the result will be a huge capital gains tax. A friend suggests aninstallment sale to spread out the tax over perhaps five or more years. Butmother’s tax adviser suggests a tax-deferred exchange. Which is best? –ScottS.

DEAR SCOTT: Just for the record, a person in her 60s is not”elderly.” Both an installment sale and a tax-deferred exchange aregood alternatives for your “senior citizen” mother.

It will probably take the developer several years to receiveall his permit approvals so he will likely welcome an installment sale withperhaps a 10 percent or 20 percent cash down payment and your mother carryingback an 80 percent or 90 percent mortgage for five years or so. That willspread out your mother’s capital gain tax and give her some interest income.

But an Internal Revenue Code 1031 tax-deferred exchange foranother investment property or perhaps a management-free tenancy-in-common(TIC), such as part ownership of a shopping center, office building orwarehouse, could completely avoid any capital gains tax and offer potentialfuture appreciation in market value and current tax benefits. Either is a goodchoice. For more details, your mother should consult her tax adviser.

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 Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2007 Inman News

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