Qualifying for Tax Exemptions

Q: DEAR BOB: My husband and I have been married and filing joint income tax returns for the 10 years we have lived in the house I bought in my name alone. His name is not on the title or the mortgage. We plan to sell the home in the next year. Are we eligible for the $500,000 tax exemption? -- Nancy V.

A: DEAR NANCY: Yes. Although the title is in your name alone, if both you and your husband have occupied the house as your principal residence for 24 of the 60 months before its sale, you qualify for up to $500,000 tax-free capital gains.

Internal Revenue Code 121 does not require the names of both spouses to be on the title or the mortgage obligation.

DEAR BOB: I would like to acquire my elderly neighbor's house so I can build a large home across his lot and mine. But he refuses to sell to me. I want to present him with an offer for an open-ended purchase option or a right of first refusal. His health is deteriorating. I am willing to wait for the property to become available as part of his estate. He has no children and is unmarried. What strategy can I suggest without being perceived as the grim reaper? -- Allan G.

DEAR ALLAN: If the neighbor needs money, perhaps he will sell you an option to buy his property at a time to be determined by him within the next 10 years. Nonrefundable option money, applicable to the purchase price, is negotiable. Customarily, it is 1 to 3 percent of the option purchase price.

However, you do not want a right of first refusal. That gives you only the right to match any purchase offer the neighbor receives from another buyer. It ties up the property but doesn't give you the right to acquire the property until someone else offers to buy it. Rights of first refusal create messy situations.

Or you could buy the property now, giving the neighbor a life estate so he can remain in his home as long as he wishes or until he dies. A local real estate lawyer can explain further.

DEAR BOB: We are considering buying a three-year-old condo in a building that has a 48 percent rental population. The homeowners association has no rental restrictions other than a six-month minimum lease. We plan to live in our condo for a long time, want a stable living environment in a well-maintained building and are interested in making a solid investment. Do you recommend that we proceed with this purchase? -- Kathleen L.

DEAR KATHLEEN: No. Forty-eight percent renters is extremely high for a fairly new condominium. That is a bad sign because there are too many absentee owners.

Your interest rate, if you can obtain a mortgage in that building, will probably be much higher than for a condominium complex where there are few renters. Because there are more than 20 percent renters, my best advice is keep looking.

A high percentage of renters shows that owner-occupants steer clear of that property. When the building was constructed, maybe the developer couldn't find enough owner-occupants and he sold to absentee investors who wanted to keep maintenance expenses as low as possible. Also, renters are more likely to cause behavior problems, whereas owner-occupants want to maintain the property to higher standards.

DEAR BOB: My mother died. She had a trust, with my sister trustee. I also have a brother. Who decides the sales price for the house when a purchase offer comes in? Is it my sister alone or all three of us? -- Joe S.