Real Estate Mailbag

Inflation May Render Profit 'Imaginary,' but the IRS Wants Its Share

By Benny L. Kass
Saturday, December 29, 2007

Q: I am a 90-year-old widower. I will have to sell my house when I am no longer able to drive. My question concerns the possible tax on my profit. I may get double my cost of 20 years ago, but the dollars have lost half of their purchasing power, so there may be no gain at all. I call this "imaginary profit."

I understand that in the past there was no tax for elderly people when they sold their house at a gain. Is there such a law now?

A: You may think of it as imaginary, but if you made a profit, you must pay the applicable tax.

There is no federal law that allows elderly people in general to avoid capital gains tax. Your state may have some kind of benefit; check with the state tax and revenue department.

However, a major capital gains tax exclusion is available to many home sellers no matter what their age. That is the provision that exempts from taxation the first $250,000 of profit on the sale of a principal residence ($500,000 for married couples filing jointly), as long as you have met the requirements for owning and living in the house two of the previous five years. There used to be a much less generous one-time exclusion, available only to people 55 and older; that is probably the old law you remember.

If you have profit of more than $250,000, you will owe federal tax on it. You may, though, be entitled to a break on the rate, depending on your income. The maximum capital gains tax rate is 15 percent. However, if you are in the 10 or 15 percent marginal tax bracket, you pay only 5 percent tax on capital gains. In 2007, the maximum taxable income that would put a single filer in that bracket was $31,850.

For transactions on or after Jan. 1, the capital gains tax rate for people in those lower brackets drops to zero.

To keep your tax bill as low as possible, make sure that you include all the closing costs associated with both the purchase and the sale of your home in your calculations. You should keep the settlement statements you receive when buying or selling a house, called HUD-1 forms, for at least six years after the last transaction. Better yet, keep them forever.

The board of directors of my condominium association has been considering imposing monthly renter fees. I am an off-site landlord. Can the board implement such a fee?

A: One of the basic rules of condominium living is that common expenses are to be paid by unit owners based on their percentage of interest in the property. These percentages can usually be found in the declaration, which is a legal document creating the condo association. This document is recorded among the land records in the state where the property is.

Accordingly, if the board wants to impose a renter fee, it bears the burden of justifying its decision. Does a renter cost the association more than an owner? Many associations can legitimately charge a move-in/move-out fee, but this is levied across the board; it applies whether a tenant or a new owner moves in or out of the complex.

It is true that when a person buys into a condominium, he or she is bound by the rules and regulations (and legal documents) as they exist and as they are properly amended from time to time.

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