Q-I read with great interest your detailed explanation of the ”over 55 rule” $125,000 home sale tax exemption. Because our home has appreciated greatly over many years, I figure our net sales profit will be about $200,000. I especially liked your suggestion on how to shelter more than $125,000 in profits by purchasing a replacement home, using the ”rollover residence replacement rule.” Will my wife and I qualify for this tax break if we buy into a ”lifetime care” retirement home, where we can live the rest of our lives and receive medical care?
A-No. The reason is that most lifetime care retirement homes charge an entrance fee and each resident does not own his or her own individual residence. When the resident dies, the ownership of each residence remains with the lifetime care facility.
For readers who may have missed my previous article, you are referring to the situation where a homeowner who is eligible for the ”over 55 rule”
$125,000 home sale tax exemption and has more than $125,000 in home sale profits.
To illustrate, suppose you had a $200,000 net profit on your principal residence that sold for $275,000. Subtracting your $125,000 ”over 55 rule”
exemption leaves a ”revised adjusted sales price” of $150,000 with $75,000 of taxable profit. However, if you then bought a replacement principal residence for at least $150,000, then tax on your $75,000 in remaining sale profit will be deferred, using the ”rollover residence replacement rule” of Internal Revenue Code 1034, which is available to home sellers of any age.
But I regret to report that buying into a lifetime care retirement home is not considered purchasing a residence and does not qualify for IRC 1034. For further details, please consult your tax adviser.
Recreational land
Q-On a recent vacation trip, a friend showed us a recreational development where lots are being sold at bargain prices because the developer went broke. My friend bought one of these lots and he wants me to buy the lot next door. The down payment is only $1,500. I plan to retire in about 14 years and build a cabin on this lot. The foreclosing lender will carry the mortgage at only 7 percent fixed interest. Do you think this is a good investment?
A-Of course I can`t advise on the desirability of a specific property. However, as a general rule recreational land is not a good investment. Your retirement plans are likely to change over the next 14 years. If you want to sell your lot then, it might be difficult to sell for the price you paid. But if you can afford to invest money that you will never need again and if you can afford to make monthly payments that you probably will never see again, go ahead. Please remember this warning.
Report sale to IRS
Q-In 1991, we sold our home for a net profit of about $42,000. But we rolled it over into the purchase of a larger, more expensive home, so we won`t owe any tax on our sale profit. Because no tax is due, do we have to report our home sale to the IRS on our 1991 income tax return? If so, where do we report it?
A-Yes, the sale of your principal residence must be reported on your income tax returns for the year of the sale. Use IRS form 2119. By filing this form, you will establish the amount of your tax-deferred capital gain. For further details, please consult your tax adviser.
Auction option
Q-Our home has been listed for sale about four months with no purchase offer so far. I read in the newspaper that real estate auctions are increasing in popularity. Do you think we should conduct an auction of our house to get it sold?
A-No. Real estate auctions work fine when many similar properties are being sold as a group, such as condominiums or new homes in a subdivision. But auctioning just one home at a time can be very difficult. The key to a successful auction is having easy financing available. Creating buyer excitement also is critical. This can be very difficult if the auctioneer has just one home to sell. I suggest you forget the auction idea.
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The special new report ”1992 Realty Tax Tips: 12 Chapters of Tax-Saving Ideas,” by Robert J. Bruss, is available for $4 from Tribune Publishing, 75 E. Amelia 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.
