Q–My husband and I own a duplex and live in half of it; the other half is a rental. If we sell, our net profit will be about $300,000. Can we use the new $250,000 per owner tax break on this combination personal residence-rental property or does it just apply to houses and condos? Does the $250,000 exemption apply to the entire profit or just the profit on the sale of our personal residence unit? In other words, how can we avoid tax on our entire sale profit?
A–Recently I’ve received many questions like yours from owners who live in one apartment and rent the balance of the building they own. The new $250,000/$500,000 home sale tax exemption only applies to the profit on the sale of your personal residence unit. It does not apply to the rental portion of your duplex. You might need an appraisal to allocate the sales price between the units.
I’m presuming you have owned and occupied your personal residence two of the last five years before sale. Incidentally, these two years need not be consecutive. New Internal Revenue Code 121 says the owner’s principal residence occupancy must “aggregate” (meaning, add up to) two years during the five years before the sale.
If the value of your duplex unit and the rental unit are equal, that means the $150,000 net profit from the sale of your personal residence half will be free of tax by the new $250,000/$500,000 tax exemption. However, the $150,000 profit on the rental unit sale is taxable as a capital gain at the new 20 percent federal tax rate.
The only way to avoid tax on the rental unit’s profit is to make a tax-deferred exchange. An Internal Revenue Code 1031(a)(3) Starker delayed exchange would be ideal. It allows you to sell and have the proceeds from the rental unit’s sale held by a third-party intermediary beyond your constructive receipt. You then have 45 days to designate the replacement rental property and 180 days to complete the acquisition.
Q–About 20 years ago, my wife and I bought a lot at a lake development (but not on the lake). The lot has lost value and we have been unable to sell or give it away. We no longer want the lot. How can we get rid of it? We’ve paid all the property taxes and association dues, but want to stop paying them. Please help.
A–Your situation is shared by thousands of other lot owners who no longer want their unsellable property but can’t find a buyer. Let’s face facts. Some useless land is only there to hold the world together. The obvious solution is to stop paying your property taxes and homeowner’s association dues. Since you didn’t mention a mortgage, I presume there is none. Either the homeowner’s association will foreclose on their lien for the unpaid dues, or the local tax collector will sell your lot for unpaid property taxes.
The problem is that some homeowner associations and tax collectors hound the owners relentlessly, especially if the lot is worthless. For example, I recall a lady now living in California who was being hounded for unpaid property taxes on her Pennsylvania lot. There is also a risk that a credit bureau might report your unpaid taxes on your credit report.
Q–We own a rental house on Maui, which is in a vacation home rental program. If we convert it to our principal residence, must we live in it for two consecutive years to use the new $250,000 tax exemption? If we don’t move in and sell the house on a Starker exchange, can we live in the newly purchased rental property along with renters if it’s a single family house? I’m thinking of renting rooms in the purchased house.
A–Your principal residence occupancy need not be for two consecutive years. New IRC 121 says occupancy must “aggregate” for two years out of the last five years before the principal residence sale. There have been no IRS Revenue Rulings, regulations or court cases on this issue yet. No, your tax-deferred exchange idea won’t work. Both the new and old property must be rental properties. Neither can be your personal residence. Please consult your tax adviser.
Q–I’m on worker’s compensation, able to work only part-time earning $10.38 per hour. I used to $17.01 per hour.
I can’t make my $601 per month mortgage payment. I’m often two or three months late. The mortgage company offered me a “mortgage modification package.” But I have refused to fill it out or sign it because I fear they will then foreclose. I hope my health will improve so I can earn more money. What can I do to keep my home?
A–Work with your mortgage lender to avoid foreclosure. If you refuse to cooperate, the lender has no choice but to begin foreclosure. Institutional lenders do not want to foreclose. All they want is their monthly payment. VA, FHA, Fannie Mae and Freddie Mac, plus most banks, S&Ls, and other mortgage servicers, will bend over backwards to avoid a foreclosure. That’s why you were offered a mortgage modification to reduce your monthly payments.
But you’ve got to cooperate. Phone the lender. Discuss the problem. Work something out. Be reasonable. Please don’t bury your head in the sand. If you don’t respond quickly, the lender will foreclose.
Q–What does selling a home “by owner” involve? Is it worth the sales commission savings?
A–To find out what’s involved in selling your home alone, without a professional real estate agent, please follow the recommended routine for listing your home for sale:
Invite at least three successful realty agents to give you their listing presentations. Ask your friends and business associates for recommendations of the best agents in your vicinity. Even though you’re considering selling “for sale by owner,” these agents will gladly give you their suggestions because they know most do-it-yourself home sellers fail and, after 30 to 60 days, decide to list with a professional agent. They want to be that agent.
Each agent should give you his or her CMA (comparative market analysis), showing: (1) recent sales prices of nearby comparable homes; (2) asking prices of neighborhood homes currently listed for sale (your competition); and (3) asking prices of recent listings which expired unsold. The CMA will include each agent’s recommended asking and probable selling price for your home.
In addition, the best agents will give you a written marketing plan for your home. This plan should include advertising, brochures, weekend open houses, MLS (multiple listing service) photos and Internet posting. The best agents will also give you a list of their most recent sellers so you can phone to ask, “Were you in any way unhappy with your agent? Would you list your home for sale with the same agent again?”
The agents should also show you the paperwork now required to sell a home. This includes written disclosures of defects, lead-based paint disclosure, and local required and customary inspections.
Of course, before putting your home up for sale, be sure it is in top condition and have it professionally inspected to correct serious defects. Only after you have gone through this procedure will you be ready to decide if you can sell your home alone. Most sellers conclude they need professional help. According to the National Association of Realtors, over 80 percent of homes sell with the help of a professional agent and most “for sale by owner” sellers hire an agent after 30 to 60 days.
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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.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
