Real Estate Mailbag

Q DEAR BOB: About six years ago, my widowed mother, then 68, thought she was dying, though her doctors couldn't find anything wrong. To avoid probate after she died, she deeded her house to me, her only child. Then Mom found a new doctor. He did some simple tests and found her thyroid gland wasn't working right. Now she has more energy than I do and wants to move from her house to an assisted-living center where several friends live. To do so, it will be necessary to sell "her" house. My tax adviser says that because the house was a gift to me, I took over Mom's $76,000 basis. The house is worth about $500,000. How can I avoid paying tax on this sale so Mom can get the money to move? -- Rick R.

ADEAR RICK: Your tax adviser appears to be correct. Deeding her house to you was a costly mistake for you. You received her low adjusted cost basis. Now, when you want to sell the house for your mother's benefit, there will be a large, taxable capital gain.

Because your mother is not on the title, she can't qualify for the Internal Revenue Code 121 principal residence sale $250,000 tax exemption. If your father was a co-owner of the house and your mother inherited his share, at his death she became entitled to a new "stepped-up basis" of market value. If that is the situation, be sure your tax adviser is using the stepped-up basis to adjust your cost basis. That might save you some money.

DEAR BOB: My wife and I have a revocable living trust. The title to our home is in it. When one of us dies, the trust becomes irrevocable. How will our living trust affect selling the home and the surviving spouse's right to take the Internal Revenue Code 121 $250,000 tax exemption? -- Darrell D.

DEAR DARRELL: Holding title to your principal residence in your revocable living trust has no effect on your IRC 121 tax exemption when the two of you, or the surviving spouse, decide to sell.

Your living trust is a beneficial way to hold title to your home and other real estate, as well as other assets. It does not affect your home-sale tax break.

When one of you dies, your living trust probably specifies that the surviving spouse owns the house. That spouse is then free to manage the house as before, such as refinancing or selling it.

The primary benefits of holding your home title in your living trust are that you avoid probate costs and delays when the principal trustor dies, provide for management by the successor trustee if the original trustor becomes incapacitated, and retain all the tax benefits of a homeowner.

DEAR BOB: To my surprise, my late uncle willed his house to me, but it isn't practical for my family. The house needs a little fixing up but has no mortgage, and market values are appreciating. Two real estate agents say they can sell the house for top dollar with only a 30-day listing. I'm thinking I should keep it as a rental for future market-value appreciation. On the other hand, I don't want to manage renters long-distance if there are maintenance issues. What would you do? -- Nickie H.

DEAR NICKIE: You would have little or no capital gain tax to pay if you sell now, because your adjusted cost basis is the market value of the house on the date your uncle died. Only if you sell the house for more than this stepped-up basis would there be any capital gain tax.

I rarely recommend long-distance rentals because of the drawbacks and the limited benefits. In your situation, I would take the tax-free inheritance and forget about the possible future market-value appreciation, or decline in value, and the long-distance management hassles.

DEAR BOB: I am a widow with a reverse mortgage on my house and I receive more income than I can spend. I set the excess aside for my grandchildren, who are teenagers. I enjoy my extra income, but what happens to my reverse mortgage balance when I die? Are my children responsible for selling the house and paying off the reverse mortgage balance? -- Gerta H.