The Truth About Capital Gains

Q: DEAR BOB: My wife and I bought a house in 1995 for $180,000. Since then, we have taken out home-improvement loans and now owe $320,000. Similar nearby houses sell for $600,000. In 2004, we bought a second home for $640,000 and rented out our former home. We have been told if we sell our first home within three years after buying our second home we won't owe any capital gains tax. Or should we try to sell it now although the local home sale market is a bit slow? -- Manuel A.

A: DEAR MANUEL: You received incorrect tax information. Buying a replacement home is irrelevant. Also, the mortgage balance on your old home doesn't matter.

To qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 for a single person, or $500,000 for a qualified married couple filing a joint tax return, you must have owned and occupied the home at least 24 of the last 60 months before its sale. That means you have up to 36 months after moving out of your principal residence to claim your tax-free profits. If you rent it longer than 36 months, you lose your exemption.

Because you rented the house after vacating, however, the depreciation you deducted on your tax returns will be taxed at the special 25 percent federal tax rate for recaptured depreciation. Consult a tax adviser for details.

DEAR BOB: My mom, 81, recently cosigned a 40-year mortgage for my sister. The loan is in my mom's name, but the house deed has her name and my sister's name on it. My sister has bad credit. Although she can afford it, my sister refuses to pay the monthly mortgage payment to my mom, so mom makes the payment. My dad, 79, is worried about his credit rating. I say, at their ages, does it really matter? My mother also has dementia so my sister and the bank took advantage of her. What should she do? -- Dee G.

DEAR DEE: If your mom stops paying the mortgage payments, the bank will foreclose on the house. Should it not sell for enough to pay off the mortgage, the bank could come after your mom for any deficiency loss, although that is highly unlikely. Of course, if that happens, your mom's credit will be ruined, but as you say, at age 81, who cares?

This extreme situation shows why an individual should not cosign for credit to primarily benefit another person. If you and your father knew this was going on, you should have stepped in to stop your mother from cosigning for your sister.

DEAR BOB: A few weeks ago you had a question from a man who wanted to add his girlfriend to the title to his house. You suggested use of a quitclaim deed to convey a half interest. After quitclaiming your title, how can you get it back again? I'm asking because in two years I plan to add my boyfriend's name to the title of my home we will share as our primary residence before selling it two years later. -- Jeanne S.

DEAR JEANNE: When a property owner signs a quitclaim deed, he conveys whatever interest is desired, such as 50 percent or 100 percent, has his signature notarized, and the deed is recorded to complete the conveyance. After title is transferred, the grantor can't get that title back again. Before you transfer a partial interest in your property to your boyfriend, consult a lawyer to determine the best way to hold title, and consult a tax adviser as well.

DEAR BOB: As part of my divorce settlement two years ago, I signed a quitclaim deed on the house that was in both our names, though the mortgage is still in both our names. My ex-husband has since remarried and is still living in the house. He says he can't refinance and isn't sure when he is going to sell the house. If something were to happen to him, it is my understanding I would still be responsible for the mortgage payments. Would I get the house? Or would it go to his wife? Can I make him refinance? I really want my name off the mortgage and the house. -- Teresa B.

DEAR TERESA: If you had a decent divorce lawyer, he would have resolved these issues in your divorce agreement. Because you signed that quitclaim deed, your ex-husband now owns the house in his name alone. Your name will always remain on the mortgage obligation. The lender is 99 percent certain to never release you from liability, and you can't force your ex-husband to refinance.

If your husband dies, his living trust or will determines who receives title to his house. By signing the quitclaim deed, you are out of the picture to receive the house unless he wills it to you. There is nothing you can do to force your ex-husband to refinance or sell the house to get your name off the mortgage.