Q-I must sell our home because my husband has Alzheimer`s disease and is in a rest home. I can`t afford the cost unless we sell our home. But the problem is neither of us is yet 55 and we will net a large profit from our home. I am 52 and my husband is 54. Is there any way we can use that $125,000 tax exemption even though neither of us is yet 55?
A-You can pave the way. Internal Revenue Code section 121 says you can claim up to $125,000 of home sale tax-free profits if (1) you or your co-owner spouse is 55 or older on the date of sale, (2) at least one of you has owned and lived in the principal residence three of the five years before the sale, and (3) neither of you has used this tax break before.
It appears you qualify except for the age 55 requirement. To solve this problem, you can lease the home with an option to buy until your husband becomes 55. To be almost certain your tenants will buy, be sure they put up a substantial, non-refundable option consideration that applies toward the purchase price. In addition, give them a hearty rent credit, perhaps at least 50 percent, toward the purchase price.
Then you will have rental money coming in to help pay your husband`s expenses. After he becomes 55, then your buyers can complete the acquisition and you will be entitled to the $125,000 home sale tax exemption. For further details, please consult your tax adviser.
Second home profit taxed
Q-Last August we sold our summer home for a net profit of about $60,000. Can we avoid paying tax on our profit by purchasing a Florida winter home?
A-No. The tax avoidance rules that apply to the sale of principal residences are not applicable to the sale of second or vacation homes. Even if you buy a replacement vacation home, there just isn`t any way to avoid paying tax on your sale profit. For further details, please consult your tax adviser. Lawyer`s word inadequate
Q-Several months ago, you ran a letter from a buyer who relied on an attorney`s handling of a property sale, which later proved to be defective. That is very similar to our situation. Two years ago we bought a vacation home in a rural area where local attorneys handle the closings of real estate sales. Following the local custom, we closed the sale at the office of the only attorney in town. He gave us his letter saying the title to the property is all right. But about two months ago we received a notice from the local tax collector notifying us our property will be sold for unpaid property taxes. It seems the attorney, now deceased, failed to check on the property taxes, which hadn`t been paid for several years. To avoid losing our vacation home, we paid approximately $2,400 in unpaid taxes and penalties. Do we have any recourse against the seller?
A-Possibly. It is the seller`s obligation to deliver the property free of undisclosed encumbrances, such as property taxes. If you can find the seller, that person is liable for the taxes owed before you acquired title. If the deceased attorney had errors and omissions insurance, his insurance company also might be liable for at least part of your loss.
In the future, always obtain an owner`s title insurance policy. It is far safer than an attorney`s title opinion letter.
Seller financing
Q-We are considering buying a ”for sale by owner” house. These sellers are extremely difficult, but the house is beautiful and my wife wants it very badly. The problem is the sellers insist on carrying back a 10-year mortgage at 9 percent ”interest only.” My wife is concerned we won`t be building up any equity on the mortgage. Do you think this is a bad deal and we should give up the seller financing?
A-No. An interest-only mortgage can be good for both buyer and seller. As a buyer, you will only have to pay the fully tax-deductible interest. But the seller needs only pay tax on their interest received, with no tax due on the principal. For both buyer and seller, an interest-only mortgage is a good deal.
———-
The new special report ”How to Shop for the Best Home Mortgage,” by Robert J. Bruss, is available for $4 from NewspaperBooks, 64 E. Concord St., Orlando, Fla. 32801.
Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
