Don't Be Afraid to Use 'Bargaining Power'

DEAR BOB: My girlfriend and I bought a house together in 2006 in her name because she has perfect credit. But I want to get the tax benefits. Do I need to add my name to the title, or can I get the write-off without doing that first? What is the cost? -- Mat R.

DEAR MAT: Even presuming you pay all or part of the mortgage interest and property tax payments and have proof such as canceled checks, to claim the itemized income tax deduction your name still must be on the title to the residence. The reason is that then you are legally obligated to make those payments or lose the property.

If your name is not on the title, you are a "volunteer" who is not required to make those payments. Therefore, you are not entitled to any tax deduction for the 2006 payments you made.

However, if you have been behaving yourself, you can ask your girlfriend to execute a quitclaim deed to you for a 50 percent ownership interest. The settlement firm or lawyer who handled your closing can prepare the document at minimal cost, plus the recording fee, so you will be entitled to claim the deductions for your payments.

DEAR BOB: I am in the process of selling my home, and I will have a huge capital gains tax. Someone told me the cost basis of the house will be the market value of the house when I got divorced several years after the purchase. Is that true? -- Helga B.

DEAR HELGA: Divorce does not provide a new stepped-up basis to market value. The only way to achieve a new stepped-up basis to market value is to inherit property from a deceased owner. If your spouse had died and left the house to you, then you would have received a stepped-up basis. Consult a tax adviser to establish your adjusted cost basis.

DEAR BOB: My mother and I bought our home together. Title is in joint tenancy with right of survivorship. I wanted to put the title in a revocable living trust, but was told joint tenancy is just as good because the survivor automatically gets the house after a joint tenant dies without going through probate court. Is this true? -- Ann M.

DEAR ANN: Yes. Joint tenancy with right of survivorship is fine if neither of you ever becomes incapacitated.

But what would you do if your mother has a severe stroke or Alzheimer's disease and you had to sell the home? Without her signature on the deed, you can't sell until you have the court appoint a conservator for her.

Such problems can be avoided by holding title to the house and other major assets in a revocable living trust.

DEAR BOB: Is it necessary to make an Internal Revenue Code 1031 tax-deferred exchange before converting a rental house to my personal residence? Is there some way I can avoid that dreaded 25 percent depreciation recapture tax when I sell it? If I want to claim the $250,000 principal-residence-sale tax exemption, must I occupy it for 24 months and own it for 60 months? -- Robert B.

DEAR ROBERT: If I understand your question correctly, you already own a rental house that you want to convert into your principal residence. Presuming it was not acquired in an IRC 1031 tax-deferred exchange, you can make it your personal residence at any time by kicking the tenants out (subject to their lease terms, of course) and moving in.