Q-We plan to sell our two-family duplex, but we have conflicting advice on the tax consequences. When we had our income tax prepared, the tax lady said we can defer our profit tax if we buy another duplex of equal or greater cost. But we don`t want to buy another duplex; we are tired of living next door to tenants who can be a pain in the you-know-what. We want to take the money and buy a nice single-family home. How can we do this without paying a big tax on our profit, which I estimate will be around $100,000?
A-For income tax purposes, your sale of the duplex in which you live in one unit and the other is rented to tenants is the sale of two separate properties. The sale price must be allocated between the two units.
As for the profit from the sale of your personal residence portion, you can defer all your profit tax by buying a replacement principal residence of equal or greater cost within 24 months before or after the sale. This is the famous rollover residence replacement rule of IRC 1034. But the profit from the sale of the rental unit will be taxable unless you make a tax-deferred exchange for another investment property that is not your personal residence.
For example, you could take the money from the rental unit sale and trade for a rental house costing at least as much as the sales price of the rental portion of the duplex. You also can make a Starker delayed exchange if you designate the replacement investment property within 45 days after the sale, complete the acquisition with 180 days and have the sales proceeds held by a third party intermediary in the meantime. For further details please consult your tax adviser.
Q-We thought we had sold our home. The sales contract said the sale was to close within 30 days. But the buyers couldn`t get a new mortgage, so we said they could have an additional 15 days to close the loan. They still weren`t ready to close, refused to return our phone calls or our real estate agent`s and were very nasty to us. After waiting a month beyond the scheduled closing date we sold our home to a back-up buyer, who paid us cash and closed the sale within a week. Now the first buyers are suing us, the real estate agents and the buyers. They say we told them to take their time about closing. But the purchase contract read, ”Time is of the essence.” I should add that the house has appreciated in value because a shopping center will be built nearby. What should we do?
A-Consult a real estate attorney to answer the complaint. Your situation is a classic example of why everything, especially that time extension for closing, should have been in writing. The written time extension would have stated that the buyer was being given only 15 days more. Your giving them a month additional to close the sale was more than reasonable. Now it seems they are taking advantage of your good nature. After you win the case you may want to consider suing their attorney for malicious prosecution as this suit appears to be groundless.
Q-My wife and I are thinking of selling our home and carrying back a second mortgage for the buyer. Our VA first mortgage is assumable. We can use the extra interest income, as the rate is higher than we can get at a bank or S&L. But what happens if the buyer doesn`t make the payments on the first mortgage?
A-If your borrower falls behind on the payments on the first mortgage, to protect your second mortgage you should step in to make the first mortgage payments, then begin foreclosure on your second mortgage because failure to pay the first mortgage is a default on the second mortgage.
If your second mortgage goes all the way to a foreclosure sale because the borrower doesn`t cure the default and if there are no bidders at the foreclosure sale to pay off your loan, then you get the house back to resell for a second profit. Rather than fearing a default, you should look forward to it. Please consult a real estate attorney for further details.
Q-Should we get a fixed or adjustable rate mortgage on a home we are buying? Which is best in today`s money market?
A-Adjustable rate mortgages shift the lending risk that interest rates might rise from lender to borrower. To compensate for this risk, the ARM borrower should receive a lower interest rate.
That happened when ARM interest rates were as much as 2 percent below fixed rate loans. But now the spread during the ARM ”teaser period” for the first six months is only about 1.5 percent, and after the first adjustment it is barely less than the fixed interest rate.
Because ARM borrowers are not receiving much of a lower interest rate to compensate for their risk, in today`s mortgage market I think borrowers who can qualify for fixed rate loans around 11 percent will sleep better by staying away from adjustable mortgages.
But if you only can qualify for an adjustable rate mortgage, go for an ARM tied to the cost of funds index. This index is rising but it moves very slowly. It has gone up only about 1/2 percent in the last year while the six- month Treasury bill index has risen almost 3 percent, so stay away from ARMs tied to the Treasury bill index.
Q-We want to sell our large old home in which we have lived 28 years and buy a smaller house or a condo. We will have a profit of $175,000, more than our $125,000 ”over 55 rule” tax exemption. Is there any way to shelter the remaining $50,000 profit from tax?
A-Yes. You can combine the over-55-rule, $125,000 home sale tax xemption with the ”rollover residence replacement” available to home sellers of any age.
Suppose your home`s adjusted cost basis (purchase price plus any improvements) is $25,000, and you sell it for a net sales price of $200,000 and a $175,000 profit. I presume you meet the over-55-rule requirements of (1) owning and living in the home any three of the five years before the sale, (2) at least one coowner spouse is 55 or older on the sale date and (3) you or your spouse have not used this tax break before.
Subtracting the $125,000 exemption from the $200,000 net sales price leaves a ”revised adjusted sales price” of $75,000. Then if you buy a replacement principal residence costing at least $75,000 within 24 months before or after the sale, you can defer profit tax on your remaining $50,000 profit. See your tax adviser for details.
Q-We want to sell our home and live full time in the vacation home we have owned five years. Our home should sell for $185,000. Our vacation home only cost us $22,500, but we will add improvements costing about $50,000. Can this situation qualify for tax deferral on the $70,000 profit from the sale of our home?
A-No. The rollover residence replacement rule of IRC 1034 requires tax deferral when selling your principal residence and buying a replacement principal residence of equal or greater cost within 24 months. You bought your vacation home more than two years ago, so it is ineligible. Another problem is the cost is much less, so it could not qualify even if you met the time requirement. See your tax adviser for details.
Q-Thank you for sharing a letter in which the lady listed her home for four months with a realty agent who only advertised the house twice and only held two open houses. After reading it, when I put my house up for sale in January I listed it for only 30 days. I interviewed several realty agents, and all wanted 90 days listings. But I told the one I liked best I would renew her listing if she did a good job but I didn`t want to be stuck with a long listing if she didn`t work hard. I was extremely pleased, and I`m sure the agent worked so hard because she knew she only had a short time. It took about three weeks to get the first offer, then things moved fast and the house was sold with no problems. Why don`t you recommend 30-day listings?
A-I have switched to 30-day listings, too. But every time I say real estate agents work hardest, smartest and fastest just before the listing is about to expire, you should see the hate mail I get from hot-tempered real estate agents. They write long letters telling why it takes at least 90 days to sell a home. In a slow market that is correct. But even in a slow market a 30-day listing keeps the agent constantly hustling to keep the seller happy. If the listing expires with the home unsold but the agent is doing a good job, the seller should renew the listing for 30 days more. If the agent is doing a poor job, the seller is not stuck with a lazy agent. A short listing is good for the realty agent, too, because when the home is sold quickly, the agent gets the sales commission as soon as possible.
