Sellers misled about real estate tax break

DEAR BOB: Due to a job promotion and transfer we must sellour house of 21 years. Our nice problem is the net profit will be about$625,000. My wife and I are aware $500,000 of that amount for a married couplewill be tax-free, thanks to Internal Revenue Code 121. However, my insuranceagent told me that if we buy a replacement principal residence of equal or greatercost, we could also avoid paying tax on the additional $125,000 capital gain.Is this true? –Cheryl R.

DEAR CHERYL: No. I hope your insurance agent knows moreabout insurance than he does about income taxes.

Purchase Bob Bruss reports online.

Since 1997, purchase of a replacement principal residencehas nothing to do with avoiding capital gains tax on the sale of a formerprincipal residence. Your insurance agent is nine years behind the times.

But the good news is the maximum federal long-term capitalgains tax rate is only 15 percent, plus any applicable state tax. That is asmall price to pay for enjoying your huge capital gain, which is tax-freeexcept for $125,000. For more details, please consult your tax adviser.


DEAR BOB: My husband and I are trying to sell our home. Westupidly chose a new Realtor who said she would list our house on a reducedsales commission. After almost two months, we have had only seven prospectsinspect the house. Is there any way we can change Realtors? –Tracey P.

DEAR TRACEY: I suggest you contact the listing agent’sbroker or office manager to discuss the transfer of your listing to anexperienced, successful agent within the same brokerage who sells homes in yourvicinity.

To get more buyers’ agents to show your home, you shouldadjust your sales commission upward to be competitive with other nearbylistings.

After the listing transfer, your original listing agent willget a referral commission when the home sells and you will then have an experiencedsuccessful agent working hard to get your home sold. As the home sales marketslows, primarily due to rising interest rates, you need the best availablelisting agent. This is no time to be cutting sales commissions or listing withan inexperienced new agent.


DEAR BOB: I am about to undertake my first fixer-upperhouse. I recall you recommended a “how to” book in the past. What isthe title? – Frank C.

DEAR FRANK: A superb new book is “Find It, Fix It, FlipIt,” by Michael Corbett. You will love this unique book, which is not only”how to” but also explains how to upgrade a run-down house into abeautiful swan. The book is available in stock or by special order at localbookstores, public libraries, and


DEAR BOB: Fourteen months ago I rented a condo. The newowner resides out of town with no intent to live in the condo. We met eachother and got along well. Then he learned the condo homeowner’s associationabsolutely forbids rentals. So he deeded me a 1 percent ownership interest onthe title so I can occupy as an owner. But I recently lost my job, am unable tocollect unemployment, and am behind on the rent. Now the 99 percent owner hasbeen threatening me, harassing me, and showing up to let himself into my unitwithout notice. He wants me out within a week. He is mean and relentless. Whatlegal rights do I have? –Renee C.

DEAR RENEE: Your landlord must follow the unlawful detainereviction procedures. They require giving you a Notice to Pay Rent or Quit. Ifyou don’t pay the rent, he must then serve you with a court summons andcomplaint, which gives you time to file an answer with the court. After that, acourt hearing will be scheduled.

Only after the landlord has obtained a court judgmentordering eviction can he have you physically removed by the local sheriff.Meanwhile, the landlord has no right to enter your condo unit without at least24 hours advance written notice (except in an emergency). If necessary, you canobtain a court restraining order against the landlord. For details, pleaseconsult a local real estate attorney.


DEAR BOB: I recently bought a house where I hope to live forthe next 30 to 40 years. But I have had to do costly repairs and maintenance,such as replacing aging wiring, replacing the main sewer line, installing abathroom door, roof maintenance, interior painting, carpeting, and landscaping.Which of these expenses should be capitalized and added to my cost basis andwhich are non-deductible repairs? –Lauren C.

DEAR LAUREN: Save all your receipts for home improvementsand repairs. Your goal is to capitalize as many expenses as possible and addthe upgrade costs to your adjusted-cost basis.

For now, just save the receipts. When you eventually sellthe house in 30 or 40 years, that’s the time to categorize the expenses asimprovements to be capitalized or repairs, which have no tax significance.

The general rule is if the expense extends the useful lifeof the property, or enhances its market value, it is a capital improvement. Butother costs, such as painting, are repairs, which have no tax significance foryour personal residence. More details are available from your tax adviser.


DEAR BOB: In November 2005 I bought a brand-new house. Butthe county tax assessor recently sent me a letter than the assessed value willbe approximately $25,000 higher than my purchase price. What should I do?–Paul C.

DEAR PAUL: You should pay a visit to the county taxassessor’s office to review the appraisal for higher than your home’s recentpurchase price. Perhaps you got a bargain price because it was a builder’scloseout or for another reason. As a property owner, you are entitled to lookat your home’s assessment file to determine if there was a mistake.

Unless there is a valid justification, after reviewing yourfile, you should consider filing an appeal with the assessor’s office to getyour assessed value reduced based on recent sales prices of comparable houseslike yours.


DEAR BOB: About five years ago, I converted a rental house(that had been depreciated down to land value) to my personal residence. If Isell it today, can I take the $250,000 principal residence sale tax exemption,or will I have to recapture all the depreciation I deducted when it was arental? — Thomas S.

DEAR THOMAS: Presuming you did not acquire the house in anInternal Revenue Code 1031 tax-deferred exchange, and you owned and occupied itat least 24 of the 60 months before its sale, as a single principal residenceseller you can qualify for up to $250,000 tax-free profits. A qualified marriedcouple filing a joint tax return in the year of home sale can qualify for up to$500,000 tax-free capital gains.

However, the depreciation you deducted while the house was arental will be recaptured (that means “taxed” to us ordinary folks)at the special 25 percent federal tax rate. Please consult your tax adviser forfull details.


DEAR BOB: I have an investor loan of $25,000 at 10 percentfixed interest with a two-year balloon payment on a rental property. Would itbe beneficial to pay this loan off with my 7.3 percent variable home equityloan secured by my principal residence? –Eric P.

DEAR ERIC: Gosh, let me check my calculator. That 7.3 percentinterest sounds much lower than 10 percent interest, especially sincethat high-interest loan has a balloon payment due in just two years. If thereis no prepayment penalty, get rid of it.


DEAR BOB: Fifteen years ago, my girlfriend was under adeluge of bills. She signed a quick claim deed on our house to me anddisappeared. I’ve paid off the mortgage but can’t locate her. The house hasappreciated greatly in market value. I want to sell. How do I establish a costbasis? –Robert H.

DEAR ROBERT: As a general rule, your basis is the purchaseprice, plus closing costs that were not tax deductible at the time of homepurchase, plus capital improvements added during ownership, minus anydepreciation deducted for rental or business use of the property.

If your ex-girlfriend signed a quitclaim deed (not a quickclaim deed) to you, and it was properly recorded, you don’t need to locate herbecause you hold marketable title. For more details, please consult your taxadviser or a local real estate attorney.

The new Robert Bruss special report, “How to Get theBest Appraisal of Your House or Condominium,” is now available for $5 fromRobert 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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