Partial real estate tax break granted for the right reasons

DEAR BOB: If my partner and I sell our jointly owned home,will we owe capital gains tax if we sell before owning it for two years? Wewill probably each make about $50,000 profit –Gina B.

DEAR GINA: The fact you are not married to each other isirrelevant. What matters is both names are on the title to your principalresidence, and you are selling before owning and occupying it at least 24 ofthe last 60 months before its sale.

Purchase Bob Bruss reports online.

If you can meet that test, Internal Revenue Code 121provides up to $250,000 tax-free capital gains for each co-owner.

However, IRC 121 specifies if the reason for theprincipal-residence sale after less than 24 months of ownership and occupancyis a health reason, change of employment location qualifying for themoving-cost tax deduction, or “unforeseen circumstances,” eachqualified co-owner might be eligible for a partial deduction.

To illustrate, suppose the reason for selling your home ischange of employment location at least 50 miles further away from your homethan your current job site. Let’s also suppose you each owned and lived in theresidence 12 months. Therefore, each co-owner would be eligible for up to$125,000 (50 percent) of the $250,000 tax-free home-sale profit exemption inthis example. For full details, please consult your tax adviser.


DEAR BOB: I heard there is talk of changing the InternalRevenue Code 121. Is this true? –Kathleen B.

DEAR KATHLEEN: No. Most home sellers are very happy with IRC121. The only proposal in Congress of which I am aware is to raise the $250,000principal residence sale tax exemption. But, due to the federal budget deficit,chances of that happening anytime soon are slim to none.


DEAR BOB: I am going to refinance my home and want to add mygirlfriend to the mortgage. Should we be “tenants in common?” Sinceboth of us will be responsible for paying the mortgage, can we both claim theinterest deduction on our tax returns? –Mike T.

DEAR MIKE: If you are not married, but both of you holdtitle to the residence, then the individual co-owner who actually pays themortgage interest and/or property tax payments is entitled to deduct that totalamount on his or her individual tax return. As for the best way to hold title,please discuss that with a local real estate attorney.

Both names must be on the title if you each are to claim thedeductions you each pay. Be sure to keep your cancelled checks to prove yourindividual payments. Your tax adviser can give you further details.


DEAR BOB: My condominium has been listed for sale over twomonths with a very fine Realtor. But the local market seems “slow.”She has held a “broker’s tour,” advertises it every week, has itlisted in the local MLS (multiple listing service) and on the Internet, andholds a Sunday open house twice a month. Although the condo interior is verynice, especially since it is “staged” to show its best, the problemis the condo’s street “view” isn’t very attractive. I’ve reduced theasking price twice. After showing her your recent item about how you’ve usedlease-options to “sell” homes, she said lease-options don’t work andshe wouldn’t even consider advertising it as a lease-option. Any suggestions toget my condo sold? –Byron A.

DEAR BYRON: Most Realtors have never done a lease-option. YourRealtor probably doesn’t understand the lease-option benefits for seller, buyerand agent.

When selling a house or condo “the regular way”doesn’t work, my experience has been a properly structured lease-option alwaysworks to get the home “sold.”

As I often tell listing agents, it’s better to do alease-option and earn part of your commission up-front and the balance when theoption is exercised than to earn nothing when your listing expires unsold.Details are in my special report, “How to Profitably Use a Lease-Option toBuy or Sell Your Home or Investment Property,” available for $5 fromRobert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant delivery at


DEAR BOB: My friend went through a divorce about a year ago.Her ex-husband convinced her to do an Internal Revenue Code 1031 tax-deferredexchange. She bought a ski condo with him and their son. They have no writtenagreement on when to sell or other specifics. The college-age son takes care ofthe rentals. My friend wants to sell her interest in the ski condo. Is thereany way she can force her ex-husband to buy her out? –Jessica W.

DEAR JESSICA: No. Without a written partnership agreement,including a buy-out arrangement, your friend can’t force her ex-husband to buyher out, other than by begging and pleading.

But she can bring a “forced sale.” The legal termis a partition lawsuit.

Your friend can get a court order in the county where thecondo is located ordering the sale of the condo, with the sale proceeds dividedamong the co-owners.

For details, she should consult a real estate attorney inthe county where the ski condo is located. As a practical result of filing thelawsuit, if the ex-husband wants to keep the condo (perhaps because of thedeferred capital gains tax which would become due), he might agree to buy herout.


DEAR BOB: You frequently advise against parents makinglifetime gifts of property to their children. If they went against your adviceand did that, wouldn’t the value of the home be subject to gift tax? –MarleneM.

DEAR MARLENE: Possibly. If total nonexempt gifts of theparents exceed the lifetime $1 million per person federal gift-tax exemption,the property gift will be subject to gift tax.

Even if no gift tax is due, if the annual gift from eachdonor per donee exceeds $12,000, a federal gift tax return must be filed. Theamount of the nonexempt gift is subtracted from $1 million lifetime exemptionfor each donor, thus reducing their gift-tax exemption and their federalestate-tax exemption (currently $2 million).

Also, the donees should be aware they must take over thedonors’ presumably low adjusted cost basis for the home. If they insteadinherit the property, they receive it with a new “stepped-up basis”to market value on the date of the last decedent’s death. For details, theparties should consult their tax advisers.


DEAR BOB: I have around $300,000 “idle equity” inmy home. My current mortgage balance is only about $34,000. Although I amretired and in good health, I am “only” 64, so a reverse mortgagewon’t give me much because I am too young. I have a decent retirement income,but not enough to afford to go with my friends on cruises and afford otherfrivolous expenses like a new car. The wonderful banker at my community bank,where my late husband did business for many years, suggests I get a 30-yearfixed-rate mortgage with “interest only” payments for the first 10years. There is no negative amortization, which you often warn about. He says Ican easily afford the monthly payments, even after they “adjust” in10 years to pay off the loan in 20 more years. My children advise against it.Your opinion please –Mavis R.

DEAR MAVIS: Go for it! Enjoy your home equity. Your selfishchildren know you will be spending their inheritance so they want to discourageyou from fully enjoying your retirement while you are still in good health.

There is nothing “all bad” with an “interestonly” home loan that has no negative amortization. The mortgage youdescribe sounds ideal as long as you can afford the monthly payments on yourretirement income, both now and in 10 years when the monthly payment adjusts.

The type of mortgage that gets homeowners in financialtrouble is the so-called “option mortgage” where the monthly paymentsare so low they don’t even pay the interest. When that happens, the lender addsthe unpaid interest to the mortgage balance, resulting in negative amortizationwhere the borrower owes more than the original balance.

The new Robert Bruss special report, “The 20 EssentialQuestions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’sMarket,” is now available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant delivery Questions for thiscolumn are welcome at either address.

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

Copyright 2006 Inman News

To search and research real estate data for more than 130 million properties nationwide, sign up for a FREE trial to RealtyTrac.

For the latest real estate news and trends get a FREE issue of our award-winning real estate newsletter, the Housing News Report.

Related Posts

Leave a Reply

Copyright © 2018 Renwood RealtyTrac LLC - All rights reserved