Q–About 10 years ago, a friend and I bought a house in joint tenancy. He lived here for a while and then moved out about six years ago. I have lived in the house for the entire 10-year ownership. If we sell the house now and split the profits 50-50, can we each claim our $250,000 home-sale tax exemption? The net profit will be about $400,000.
A–No. Internal Revenue Code 121, the $250,000 home-sale tax exemption law, requires the seller to have owned and occupied the principal residence an “aggregate” of two years during the five years before the sale.
You clearly qualify for up to $250,000 of tax-free home-sale profits, but your co-owner joint tenant does not qualify since he has not occupied the home as his principal residence for two out of the last five years. The net result is your share of the profit is tax exempt up to $250,000, but your joint tenant co-owner will owe tax on his half of the profit sale. For further details, please consult your tax adviser.
Q–Several weeks ago you suggested a buyer look into 97- and 100-percent mortgage financing. When I saw that, I realized you wrote it for me, too. I started “dialing for dollars” and checking Internet mortgage lenders. I found several offering such financing, and one even gave me “preapproval,” but the mortgage won’t be cheap.
I am a single guy, 27, with great income, but not much savings. I only have one credit card so not much of a credit record. I’m thinking of buying a nice condo about six blocks from my job so I can walk to work. My parents, who live on a farm in the Midwest, say I should wait to buy a home until I can pay at least 25 percent down on a house, not a condo. Meanwhile, last month my landlord gave me a 60-day notice of a $120 rent increase. Should I buy or continue to rent?
A–Buy. Although 97- or 100-percent mortgage financing is not cheap, especially since you will have to pay private mortgage insurance (PMI) premiums, after the tax deduction savings, you will probably be much better off than continuing to waste money on rent. With a zero or low down payment, you really don’t have much to risk.
Your parents live in a different environment. When I bought my first house at your age, actually it was three units–a house plus two rental units in back, my parents thought I was crazy. But that first real estate purchase enabled me to build equity so I could later move up and buy the house where I live today. You will probably have a similar successful experience.
Q–My dad is dying of cancer. His doctor says he could live up to six months, but my father wants to deed me his house and a three-unit rental property now to avoid probate because he hates lawyers.
However, following your advice, I urged him not to do so because then, as you explained, I would take over his low cost basis for these properties. He even asked me to have the deeds prepared. What should I do?
A–Accepting those deeds could be a costly mistake for you. The reason is you will take over your father’s low cost basis for those properties. When you eventually sell, you will then have to pay a big capital gains tax.
Your best alternative is to convince your father to put his properties and other assets, such as stocks, bank accounts and other major holdings, into a living trust. He will then accomplish his goal of avoiding probate and cheating the lawyers out of their probate fees.
You can be named the alternate or successor trustee. The result will be a new adjusted cost basis stepped-up to market value on the date of his death, but you will avoid capital gains tax.
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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, IL 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.
