Q–I realize you’re probably sick of answering questions about that new $250,000 home sale tax exemption, but I hope you’ll consider mine. I am single, 63, and have owned my house for many years. I only paid about $55,000 for it, but it has appreciated to well over $500,000 in market value. Now I want to sell. My problem is that I’ll owe tax on about $195,000 profit after subtracting my $250,000 exemption. Is there any way I can get out of paying tax on that profit?
A–No. In the absence of special circumstances, single sellers with more than $250,000 in home-sale profits get stuck paying capital gains tax (at the new 20 percent rate) on sale profits over $250,000. Of course, if you were married, then up to $500,000 of home sale tax-free profits would be available for a qualified husband and wife who file a joint tax return in the year of sale.
Unless you’re willing to participate in some tax acrobatics, such as moving out, renting your house to tenants to converting it to rental status, and then making an IRC 1031 tax-deferred exchange for another rental property, there is no magic way to avoid tax when a single person’s home sale profit exceeds $250,000.
Of course, I’m presuming you’ve been single all along and you didn’t receive any portion of the house by inheritance, such as from a deceased spouse, to gain an increased stepped-up basis on all or part of its market value. If this is your situation, please consult your tax adviser to calculate your stepped-up basis to market value on the date of the deceased co-owner’s death.
Q–We were very pleased when our Realtor found a full-price buyer for our home just four days after we listed it for sale. Naturally, we accepted the offer. It contained a mortgage finance contingency, which the agent says is normal. That contingency has now been removed.
However, the offer also contained a clause saying “Subject to complete inspection and approval of the property by buyers or their authorized professional inspector.” So far, over three weeks later, nobody has come to inspect our home. Does this mean the inspection clause is waived? Our agent has tried to contact the buyers, but they don’t return her phone calls. What happens if the buyers don’t hire a professional inspector?
A–I presume your listing agent “double ended” the sale and is acting as a dual agent, representing both seller and buyer. If there is another agent in the picture, representing the buyers, that agent should be contacted to find out why the buyer hasn’t hired a professional inspector.
That inspection clause was not written very well. It should have contained a time limit, such as five days, or the inspection contingency is waived by the buyers. I suggest your Realtor keep diligently trying to contact the buyers. Perhaps a visit to their residence will yield a signed waiver.
At this point, because the buyers have had plenty of time, your listing agent should press for waiver of the inspection contingency, which, arguably, has been waived by the passage of a reasonable time. Please consult a local real estate attorney for more details.
Q–I enjoyed your article a few weeks ago about how to save money on homeowners’ insurance. For the last year, I’ve been arguing with my insurance agent about how much replacement-cost insurance we need.
Our home is very modest–only about 1,500 square feet excluding the garage. The agent estimates it would cost about $200,000 to rebuild our home in the event of a total fire loss.
But I checked on construction costs, and home builders tell me our quality of home can easily be rebuilt for $100 or less per square foot. In other words, we are overinsured by at least $50,000. But the agent refuses to reduce our policy limit. What can we do?
A–Switch to a different insurance agent. Don’t put up with an agent who, without justification, is overinsuring your home simply to raise the premium (and his commission).
Q–Thanks for your excellent article a few weeks ago summarizing the benefits of reverse mortgages for senior citizen homeowners. My mama, 73, owns a free and clear house worth about $600,000. Pop died about six years ago.
When he died, his excellent pension and other retirement benefits ceased. My mama is “house rich and cash poor.” I’m not in a position to help her much financially. She loves her home and doesn’t want to sell.
I looked into the FHA and Fannie Mae reverse mortgages for her, but their loan limits are much less than her home is worth. Since Transamerica pulled out of the reverse mortgage business, is there any other reverse mortgage lender for homeowners with expensive homes?
A–Transamerica withdrew from the reverse mortgage business in early July. That leaves only FHA and Fannie Mae as nationwide reverse mortgage lenders (except in Texas, which still doesn’t allow reverse mortgages). FHA’s maximum is only $170,362, but Fannie Mae will loan up to $227,150 on its HomeKeeper reverse mortgage plan.
This is the biggest reverse mortgage loan currently available, except in Arizona, California, Colorado and Washington, where Financial Freedom Plan loans up to $1 million on reverse mortgages.
Q–Our home has a second mortgage with a balloon payment due in February 1999. Do you think we should refinance now? Or should we wait until later in the year in the hope mortgage interest rates will decline?
A–Today is an ideal time to shop for a refinanced home loan. You don’t need to rush, but when you find a mortgage you like, I wouldn’t wait longer to refinance. By starting your mortgage search now, you won’t be under last-minute pressure to refinance to pay off that balloon payment.
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Have a question about real estate? You can write to Robert Bruss in care of Tribune Real Estate Features Service, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611. Answers will be provided only through the column. Please note that laws vary from state to state and area to area. Consult an attorney for specific legal advice.
