Q-After 28 years of marriage, two weeks ago my wife said she wants a divorce. At first I was shocked, but I have come to accept her request. Since our children are grown or in college, we have decided to sell our home and split everything equally. Our best investment was our home. We only paid about $55,000, but now it is worth well over $300,000 because it is in a very prime area. As my wife and I are both over 55, do we split that $125,000 tax exemption equally, or is there some other way to avoid tax if I buy another house?
A-I have some good news for you. If you and your wife wait to sell your house until after the divorce is final, you each can claim up to $125,000 of tax-free home sale profits by each using the ”over 55 rule” separately.
Internal Revenue Code section 121 allows only one $125,000 tax exemption per marriage. However, two unmarried co-owners of a principal residence who each meet the occupancy requirement-three of the five years before sale-and who have never used this tax break before can each use this exemption and claim up to $250,000 total tax-free home sale profits.
To summarize, if you wait to sell your principal residence until after your divorce is final, then you can get up to $125,000 tax-free sale profit and your ex-wife also can get up to $125,000 tax-free sale profit. Then it won`t matter whether you or your ex-wife buys another principal residence since all your profit will be tax-free. Please consult your tax adviser for further details.
Q-My husband and I recently bought a triplex. We live in one apartment and rent the other two. Our question is how do we make the purchase price allocation between the depreciable building value and the nondepreciable land value? There is only a very small back yard.
A-You can use any reasonable method of allocating the purchase price among the value of the depreciable rental units and the nondepreciable value of the land and your personal residence apartment.
My favorite technique is to start with the insurance company`s guaranteed replacement cost estimate for the building. Whenever you buy a property, always have your insurance agent inspect it and issue a guaranteed replacement cost policy. Then allocate this amount between the estimated value of the two rental units and the value of your nondepreciable residence unit. The rest of the purchase price is the nondepreciable land value.
Of course, you can use the local tax assessor`s land-to-value ratio, but this usually is not accurate. Or you can hire a professional appraiser. But these methods are not as good as the insurance replacement cost method because your insurance agent must be accurate or the insurance company must pay any loss over the insured amount.
Q-I rent my store on a lease that has five years remaining. Recently I spent about $14,000 making major improvements. Can I write off these improvements this year on my income tax returns?
A-No. Leasehold improvements must be amortized (depreciated) over the lease term. If your 5-year lease contains any renewal option and you are likely to exercise your renewal option, then the improvement depreciation period must include the option term. Consult a tax adviser for details.
Q-In March, 1988, we sold our home and moved to a rental apartment. We originally planned to build a home on land we own, but financial reverses caused us to change our plans. Now we are undecided if we will build a new house or continue renting. We realize we must report our home sale on our 1988 income tax returns. I understand we have two years to decide if we want to defer our profit tax by acquiring another house. If we haven`t decided by April 15, 1989, do we have to pay our tax?
A-No. You are referring to IRC 1034, the ”rollover residence replacement rule.” This tax law allows you to defer profit tax on the sale of your principal residence if you buy a replacement home of equal or greater cost within two years before or after the sale.
Since you have not yet reached the end of your two-year home replacement period, when you file your 1988 income tax returns on your IRS form 2119 reporting the sale of your home, just indicate if you plan to buy a replacement home. If you fail to do so, you will owe tax plus interest on your profit. Consult your tax adviser for full details.
Q-When our Realtor showed us the home we bought about two months ago she carefully read from the multiple listing the items that were to be included in the sales price and the things that were excluded. I recall, for example, the dining room chandelier was not included, and the seller removed it. But the seller took things we thought were included, such as the drapes, stove, refrigerator, washer, dryer, TV antenna on the roof, window blinds and ceiling fan. Most of these items were listed on the multiple listing. When we got the keys to the house and found these things missing, the Realtor said we hadn`t mentioned them when the contract was written up so she presumed we didn`t want them. But we assumed they were included automatically. We think the agent should pay us the several thousand dollars it cost us to replace these missing things. What do you think?
A-I think you and the agent were careless not to list the items of personal property you wanted to be included in the sale. Just because the multiple listing form shows the seller is willing to include listed items does not mean that the buyer must take them. For example, many buyers who own newer appliances might prefer that the seller remove the old ones.
To avoid misunderstandings, home sellers and buyers should insist that the realty agent list on the sales contract any items of personal property that are to be included in the sales price. Otherwise, the seller can remove them legally as personal property is not included in the sale of real property unless permanently attached to the building, such as a built-in stove.
