Q–We’re moving to a new location, due to a job change, and are thoroughly confused about how to pick a neighborhood. We’re working with two Realtors in different parts of town. Each promotes his area as the best. What’s the best way to evaluate a neighborhood?
A–Presuming you can afford both neighborhoods and they are within a 30-minute commute to your job, start with an evaluation of the public schools. Even if you don’t have children, top quality schools are good for home value appreciation. Bad quality public schools prevent buyers with children from moving into the area, thus holding home values down.
Ask yourselves if you feel comfortable in the neighborhood. Talk with the neighbors near the houses you are considering buying. Ask what they like best and what they dislike about the area. Look for signs of decaying, neglected buildings. Also look for positive signs, such as homeowners remodeling their residences.
Don’t be in a hurry to buy. If possible, lease with an option to buy so you don’t buy the wrong house.
Q–About 14 years ago, I inherited from my mother the house where I now live with my wife and two children. We’re considering selling and moving to a larger house. My question involves that new $250,000/$500,000 home sale tax exemption. Title to the house is still in my name alone.
Should I add my wife’s name to the title before we sell? Must she hold title for the required two years within the last five years? Most important, because I didn’t buy the house, how do I calculate the profit? According to a local Realtor, the house is worth around $475,000 today.
A–Let’s start with your adjusted cost basis for your principal residence. Because you inherited the house, your cost basis was its market value on the date of your mother’s death (or an alternative date used by her estate for valuation). In other words, how much was the house worth when you inherited it?
To this value, add the cost of any capital improvements you added, such as landscaping, room addition and kitchen remodeling. Subtract any depreciation deducted, such as for a home office. Suppose the house was worth $100,000 when you inherited it and you added $40,000 of capital improvements. Your adjusted cost basis is therefore $140,000.
Subtract this $140,000 basis from your net sales price after sales costs. If this net or adjusted sales price is $450,000, your capital gain is $310,000 in this example.
Because you have held the title and resided in the home more than two of the last five years, you clearly qualify for the new $250,000 per seller home sale tax exemption. In addition, your spouse qualifies for an additional $250,000 exemption if she occupied the residence any two of the five years before sale. The second spouse can qualify for the exemption without holding title. Ask your tax advisor for details.
Q–Several years before I met and married my husband, I bought the house where we currently live. Now my husband wants to buy some land to build on, or perhaps buy an inexpensive house to fix up in order to leave something to his children. In the meantime, we would have a summer getaway or we could rent out my house and both live in his house.
If I were to sell my house, I’d want to take advantage of the new $250,000 home sale tax break. How could he also take advantage of this new law if he fixed up his house and sold it at a profit? Does being married take away from his use of this new law?
A–No. Marriage does not create a penalty under new Internal Revenue Code 121, nor does it prohibit husband and wife from having separate principal residences. Of course, the two-out-of-the-last-five-years ownership and occupancy tests must be met. If your husband continues living in your house as his primary residence, however, the house he purchases cannot also qualify as his principal residence.
Since I presume you want to live together, you and he could move into his house for at least two years before its sale so he can qualify for the $250,000 home sale tax exemption. Meanwhile, you can keep your house as a rental for up to three years and still claim the $250,000 tax-free sale exemption when you sell it. When your housing plans firm up, please consult your tax advisor so you won’t miss out on this great new tax break.
Q–If a widow sells her house, in which she and her husband lived for 20 years, five years after his death, can she claim the $500,000 exemption allowed to a married couple? If she can only claim the $250,000 home sale exemption, isn’t she being punished because of the husband’s death?
A–The provisions of New Internal Revenue Code 121 allow a qualified surviving spouse to claim up $500,000 tax-free principal residence sale profits in the year the deceased spouse dies. If she sells after that, only $250,000 tax-free profits are allowed.
However, please be aware a surviving spouse receives a new adjusted cost basis on the deceased spouse’s inherited portion of the residence. In community property states, a new market value basis is allowed on 100 percent of the home’s value on the date of the death. In the situation you describe, the widow probably got a new stepped-up basis to the home’s market value on the date of her husband’s death. If she sells the house five years later, all or most her profit probably will be sheltered by the $250,000 exemption. Please consult your tax advisor.
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Please note: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters. You may need to consult a lawyer.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
