Paying Cash for a Home Carries Risks

DEAR BOB: I sold my principal residence on March 15, 2005, and took my $250,000 tax-free capital gain. I had lived there two of the previous five years. On Jan. 1, 2002, I moved in with my fiance, so we have now lived in his house together for 3 1/2 years. I was not on his deed, however, until we married a month ago. Can we sell this property (his residence for the past 10 years) and take a $500,000 tax-free capital gain? Does the clock start when I moved in or when I was on the deed? -- Linda F.

DEAR LINDA: You are in luck. If you meet the 24-out-of-last-60-months occupancy test (as you do) and you are married to the title holder at the time of the principal-residence sale, you and he can qualify for up to $500,000 tax-free principal-residence-sale profit if you file a joint tax return in the year of the home sale.

However, because you used your exemption on your March 15, 2005, home sale, and Internal Revenue Code 121 allows use of this tax break only once every 24 months, for you to qualify for the additional $250,000 exemption the sale must close after March 16. For details, please consult your tax adviser.

DEAR BOB: My wife and I divorced last year. Her name is still on the mortgage and she wants it taken off. She signed a quitclaim deed. I sent this to the mortgage company asking it to take her name off. I do not want to refinance because the mortgage has a good interest rate. The mortgage company refused to remove my ex-wife from the mortgage obligation. Is there any way to do this without refinancing or selling? -- Michael T.

DEAR MICHAEL: No. There is nothing your ex-wife can do to get her name off the mortgage obligation. If she had a good divorce lawyer, that lawyer would have insisted you refinance in your name alone so she could be free of that mortgage obligation on her credit reports.

Since that wasn't done as part of the divorce agreement, although your ex-wife's name is off the title after you recorded that quitclaim deed, her name remains on the mortgage until you refinance or sell. If you make the monthly payments on time, that will reflect well on her credit reports.

DEAR BOB: My grandmother died a few months ago. She owned a free-and-clear house. As part of her living trust, my two sisters, my dad, his three sisters and I are to sell the house and divide the profit evenly. What is the difference between a living trust and an inheritance? Are they taxed differently? -- Elizabeth C.

DEAR ELIZABETH: Be thankful your grandmother wisely held title to her house in her living trust. The result is that probate court costs and delays are avoided.

Because you and the others inherited the property, you are entitled to a new "stepped-up basis" to market value on the date of your grandmother's death. The fact she held title in her living trust is irrelevant. You still get the stepped-up basis. That means that if the house sells for the same market value, no capital gains tax will be due.

However, if your grandmother died this year and if her total net estate exceeds $2 million, an estate tax might be due before title to the house can be distributed to the heirs to sell. For details, consult your tax adviser.

DEAR BOB: You had a recent item about home seller carryback mortgages. One advantage you cited is that the seller can foreclose if the buyer defaults. But what about a buyer whose sellers carried back the mortgage and then died? How is the buyer protected? -- Kathy S.

DEAR KATHY: After the seller-lender dies, the home buyer continues making monthly mortgage payments to either the estate or to whoever inherited their assets.