Q–My wife and I own a rental house, which we bought 23 years ago. (Until 10 years ago, it was our primary residence.) It has been our best investment. Our problem is, if we sell it, we’ll have a profit of about $325,000. We own it free and clear. The rent we can get barely pays the property taxes, insurance, and maintenance.
After reading your comments about the 1997 Tax Act, it occurred to us we should (1) politely kick out the tenant, who’s on a month-to-month rental agreement; (2) move in for 24 months; and (3) sell this house without owing any profit tax. Is this legal?
A–Yes, presuming no local tenant protection law applies. New Internal Revenue Code 121 has created a tax bonanza for astute real estate investors like you. By moving into that rental house and converting it to your principal residence for at least 24 months, you’ll meet the new tax law’s two-out-of-the-last-five-years occupancy requirement. Presuming you and your wife file a joint tax return in the year of sale, you can then claim up to $500,000 tax-free home sale profits. Qualifying single persons can claim $250,000 exemption. Your tax adviser has full details.
Q–I’m interested in the new $250,000/$500,000 home sale tax exemption you recently discussed. You said “Principal residence is defined as residence property owned and used as a primary home by the taxpayer for periods aggregating two or more years during the five years before its sale.”
But none of the other articles I’ve read about the 1997 Tax Act has indicated those 24 months can be aggregate rather than continuous. I thought I had to live in my second home at least 24 consecutive months for it to qualify as my primary residence. For example, suppose I live in my Florida home five months of each winter during the five years before I sell it. Will this qualify for the $250,000/$500,000 exemption?
A–Yes. When all else fails, please read new Internal Revenue Code 121. It says: “Gross income shall not include gain from the sale or exchange of property if, during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating two years or more.”
The new statute goes on to limit the home sale tax exemption to $250,000 ($500,000 for husband and wife filing a joint tax return). The two years of ownership and occupancy clearly do not have to be continuous. “Aggregating” means “the whole sum or amount, sum total,” according to Webster’s Collegiate Dictionary. If your Florida residence is your principal residence (IRS Form 2119 uses the term “main home”) for five months each year, it appears you can qualify for this new tax break after five years of such occupancy. Please consult your tax adviser for details.
Q–My father passed away last June. My mother now wishes to sell their home of 44 years. She will net about $400,000 in doing so. But she is upset that the 1997 Tax Act, as we understand it, makes no concessions for newly widowed homeowners. Had they sold the home before my father’s death, they could have used the $500,000 tax exemption and kept all the tax-free profits. It seems rather harsh to cut the exemption in half after a spouse dies. Any exception?
A–Please ask your mother to consult her tax adviser. Her tax situation may be much better than you and she expect. When your father died, his share of the house passed to your widowed mother. That means she got a new adjusted cost basis on his half, stepped-up to market value on the date of his death.
Since your letter is postmarked from California, a community property state, if your mother’s home is also in a community property state, she probably got a new stepped-up basis to the home’s entire market value — not just 50 percent — on the date of your father’s death. The tax result is that your mother’s full home sale profit will probably be tax exempt, thanks to the new $250,000 home sale tax exemption. She needs to determine her new adjusted cost basis to determine if all or most of her sale profit will be tax-free.
Q–In the first week of February, we closed the purchase of our first home. The seller, a sweet little old lady, asked us for an extra week or two to move out. Since we paid our apartment rent to the end of February, we agreed, providing she pay us rent. Each Monday she has sent us a check for one week’s rent. But she hadn’t moved out by the first of March, so we confronted her. Now she admits she has no place to move. She was going to move in with her daughter, but the daughter’s husband objects. We want to move into our house. What should we do?
A–If you can’t reach an agreement with the former owner of your home, the only way to get her out is to begin an unlawful detainer (eviction) court procedure. I realize it probably won’t be pleasant, but she has your money from the sale and you are entitled to occupy your home. For further details, please consult an attorney who specializes in evictions.
Q–We have a second mortgage that has a balloon payment coming due in about two years. Its interest rate is 8 percent. Do you think we should refinance now or wait?
A–Refinance to pay off that balloon payment now. Home loan interest rates are currently very low. There is no guarantee you will be able to refinance so advantageously two years from now.
———-
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.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
