Cautious Owners Should Inspect Home Before Sale

By Robert J. Bruss
Saturday, January 13, 2007

Q: DEAR BOB: I plan to sell my home in the next few months. Is it wise to have a professional home inspector prepare a report before I list my house for sale so I can use his findings to help establish the sale price? One real estate agent tells me I should not have the report done because if buyers rely on that report only, then I am liable if the inspector misses something. The agent says home buyers in my area usually will not have their own inspection done if I have one available and therefore I am taking on more liability. What is your opinion? -- Mary B.

A: DEAR MARY: I strongly disagree with that agent. Every home seller should have a pre-listing professional inspection, as well as other customary local inspections such as for termites, dry rot, energy efficiency, building-code compliance, etc.

Then you will know the condition of your home. If there are any serious defects, you should repair them before listing the house for sale. Savvy buyers always have their own professional inspections. Unless asked, you don't have to show your own inspection reports.

After you have obtained the inspections and decided either to repair defects or disclose them to prospective buyers, interview at least three successful real estate agents who sell houses in your vicinity.

Each agent interviewed should prepare a written comparative market analysis. It will show recent sale prices of nearby houses like yours, asking prices of similar neighborhood homes (your competition) and even recently expired competitive listings (usually overpriced).

The comparative market analysis also shows each agent's recommended asking price and probable sales price for your home. Only after you have at least three such analyses are you ready to select the best agent to sell your home.

DEAR BOB: I have seen endless mentions in your articles about living in your principal residence at least two of the last five years before its sale to qualify for that $250,000 tax exemption (up to $500,000 for a qualified married couple). But what proof does the IRS require if they question eligibility? How does the seller prove it was the primary residence? -- Susan C.

DEAR SUSAN: Unless the home seller is audited, the IRS does not require any proof the Internal Revenue Code 121 principal-residence-sale requirements were met. If you qualify for the full exemption, up to $250,000 for a single principal-residence seller, or up to $500,000 for a qualified married couple filing a joint tax return, you don't even report your principal-residence sale on your income tax returns.

If the IRS should question your eligibility, you will need proof the home was your principal residence. Evidence could include utility bills, voter registration, driver's license, bank accounts, nearby employment and income tax forms filed before the house was sold.

DEAR BOB: Two sisters, both over 72, inherit a house. Their dad purchased it in 1964 for $30,000. It is now worth $750,000. If they sell it before they die, what is the rate of capital gains tax? -- Gregory D.

DEAR GREGORY: The adjusted cost basis of the house for the two sisters (their ages are irrelevant) was its "stepped-up basis" fair market value on the date of dad's death. If they made any capital improvements during ownership, the improvement cost is added to this stepped-up basis.

When they sell the house for more than their basis, the excess is their taxable capital gain.

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