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Real Estate Mailbag

By Robert J. Bruss
Saturday, March 26, 2005; Page F06

Q DEAR BOB: Almost five years ago my daughter and son-in-law bought a new condo, where they lived for several years before a job transfer forced them to move away. A friend of a friend asked to rent it, so they agreed. Recently, the tenant vacated, so they sold the condo, which had appreciated almost $300,000 over their purchase price. When they went to see their tax adviser, he said they can't claim that $500,000 exemption because they weren't living in the condo at the time of its sale. I told them I would ask your opinion. -- Marcus S.

ADEAR MARCUS: Internal Revenue Code 121 is clear. To claim the $250,000 principal-residence-sale tax exemption (up to $500,000 for a married couple filing jointly), the home must have been owned and occupied an aggregate 24 of the 60 months before its sale. You said the condo sellers lived in it "several years." If the time they lived in the condo was at least 24 months during the 60 months before the sale, they can qualify for a tax exemption on up to $500,000 in sale profits.

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IRC 121 does not require owner-occupancy at the time of the sale if the two-out-of-last-five-years occupancy test was met. Your daughter and son-in-law should consult another tax adviser, because it appears to me that they are entitled to up to $500,000 tax-free sales profit.

DEAR BOB: About six years ago our contractor neighbor asked if we would mind if he built a block wall between our two properties, and we agreed. Two years ago, we decided to tear down our house to build a new one. We had the land surveyed and learned the neighbor's block wall cut off five or six feet for the full width of our lot. Whose property is that space, ours or his? Does he have any rights in that strip based on long-term use? -- Sharon G.

DEAR SHARON: Consult a real estate lawyer. From your description, because your neighbor's fence was built on your lot, it is your fence. You are entitled to demolish it. Because you gave the neighbor permission to build the fence, he can't claim a prescriptive easement. A prescriptive easement can be acquired only by open, notorious, continuous and hostile use of another's property for the statutory period. Permissive use defeats the hostility requirement.

DEAR BOB: In 1974 my parents bought a home for my husband and me. They held the title, but we made the mortgage and property tax payments for 30 years. The oral agreement between us is that we can sell the home whenever we want. Now we would like to sell and move to Northern California, but I am told we will owe huge taxes if we do this. The house is now worth at least $725,000. Is there any way to avoid tax by buying a home where we are moving? -- Cheryl S.

DEAR CHERYL: You and your parents made a big mistake by not holding the home's title in your names for the past 30 years. Oral agreements mean nothing in real estate or to the Internal Revenue Service.

It's irrelevant that you paid the mortgage and property tax. All these years, you were not entitled to claim the tax deductions for those payments. Neither were your parents entitled to claim those deductions because they didn't pay them.

To make matters worse, if you tell your parents you now want to sell the house and expect them to honor their agreement to give you the sale proceeds so you can buy a home elsewhere, it is they (not you) who will owe a huge capital gains tax. Consult a tax adviser, but there is no easy way out of this mess.

DEAR BOB: My brother was close to our mother, who died last year at age 92. He lived near her and made sure she had the best care. I live about 1,000 miles away and am grateful to my brother for looking after our mom. For the past few years she was feeble and frail. Her will left her house to both of us. My brother says that because he holds a power of attorney, he can sell the house, deduct the nearly $250,000 he spent on mother's care, and then divide the sales proceeds with me. Is this correct? -- Susan R.

DEAR SUSAN: No. When the grantor or creator of a power of attorney dies, the power of attorney document ceases to be valid.

However, if your late mother held title to her home in her living trust and if your brother is named successor trustee under that living trust, then he has power to distribute the living trust assets without probate to the designated beneficiaries.

As for subtracting the $250,000 your brother allegedly spent on your mother's care, he probably doesn't have a legal right to do that. But it would be the right thing to reimburse him from the home's sales proceeds.

If you think your brother is taking advantage of the situation because of your distance, and if the sales price of the home is substantial, you might wish to retain a local probate lawyer to look out for your interests.


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