Getting the Facts Straight About 'IRC 121'

By Robert J. Bruss
Saturday, November 25, 2006

Q: DEAR BOB: We own two houses and meet the 24-out-of-last-60-month ownership and occupancy requirement for the Internal Revenue Code 121 principal residence sale tax exemption on both. One house is now listed for sale. When it sells, we would like to move into the other house and sell it within the next several months. If we sell one house in 2006 and the other house in 2007, can we claim the IRC 121 exemptions on both houses? -- Bonnie H.

A: DEAR BONNIE: No. To qualify for the principal residence sale capital gains tax exemption, you must own and occupy the home at least 24 of the last 60 months before its sale.

However, this tax exemption can be used only once every 24 months. When you sell one qualified house in 2006, then you can't use the IRC 121 exemption again on another home until at least 24 months later.

DEAR BOB: My wife and I have lived in my house for more than the 24 months required to claim the Internal Revenue Code 121 tax exemption. But only my name is listed on the title as the owner. I owned the house before we married. Does her name need to be added to the title to make us eligible for the $500,000 exemption? -- Arnold S.

DEAR ARNOLD: No. There is a specific clause in IRC 121 that says that for a married couple, title to the principal residence can be held in the name of one spouse alone but each spouse is entitled to a $250,000 exemption if (1) the 24-month ownership and occupancy test within the last 60 months before sale is met by each spouse, and (2) if they file a joint tax return in the year of home sale. Please consult your tax adviser for more details.

DEAR BOB: Several years ago, I heard on a radio talk show that a monthly mortgage payment is considered to be paid on the date it was postmarked. If that is true, where can I find that law? -- Ralph McG.

DEAR RALPH: There is no such law. The date the mortgage lender receives the payment is what counts. The date of mailing is irrelevant.

DEAR BOB: My mother, 82, owns her modest home, which is probably worth around $100,000. Title is in her name alone. I have showed her your articles about the benefits of holding title in a revocable living trust to avoid probate and in case she gets Alzheimer's disease or a severe stroke. But she is very stubborn and thinks because she has a small estate, worth less than $600,000, she doesn't need a living trust or even a will. I am her only heir. As her health is declining, is there any other way to avoid probate when she dies? I have heard horror stories about probate costs and delays. -- Maurice H.

DEAR MAURICE: A few states have probate court exemptions for small estates but your mother doesn't appear to qualify. I don't know where the $600,000 amount came from, but there is no probate exemption for estates below that amount.

The two primary ways to avoid probate of estates are (1) hold real estate title in a joint tenancy with right of survivorship, or (2) hold title in a revocable living trust.

Especially because your mother doesn't have a written will, after she dies probate court proceedings will be required to distribute the estate according to the state law of intestate succession where she lives. Probate court proceedings take at least six months, often much longer.

DEAR BOB: I am considering buying a manufactured home on a quarter-acre parcel in a retirement community. These homes are very nice and much less expensive than comparable "stick built" houses nearby. The big drawback my wife dislikes is they are on leased land, and there is no option to purchase the lot. But the land lease extends for 49 years. I like the adjoining golf course, nearby shopping and low cost. Is the leased land a serious problem?

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