DEAR BOB: I am 63, retired, and want to know how to sell my primary residence (on which I have about $35,000 profit) so I can use the sale money to improve my summer cottage where I would move for my principal residence. Can this be done without paying tax on my profit? Edwards L., Silver Spring.
DEAR EDWARDS: Yes, but not without expert tax help to be sure you don't make a costly tax mistake.
Your summer cottage clearly won't qualify for the "replacement residence rule." That rule, applicable to home sellers of any age, permits total profit tax deferral if you sell your primary residence and buy a more expensive one within 18 months before or after the sale. The cost of the replacement residence includes capital improvements added within the 18-month period. Since you already own the summer cottage, however, it won't qualify.
But the "over 65 rule" can save you profit tax on the first $35,000 of your principal resisence's sale price. To qualify, you must (a) be 65 of older on the title transfer date (it's all right to sign the sales agreement before becoming 65), (b) have owned and lived in the residence at least five of the eight years before sale, and (c) never have used this tax rule before.
So you could move out now, rent your house for up to three years before sale, sell after you become 65, and avoid the profit tax on the first $35,000 of the sales price. A lease with option to buy might satisfy both you and your tenant-buyer. Talk it over with your tax advisor to maximize your tax savings.
DEAR BOB: My wife and I are retiring next October and plan a move that will cost about $3,000. Is it tax-deductible? Michael K., Springfield.
DEAR MICHAEL: No, unless you'll be taking a new job located at least 35 miles further away from your old home than was your former job site. If you won't be working at your new location, there is no moving cost tax deductions.
DEAR BOB: I heard that some law limits the amount of closing costs on a home purchase. But, as a real estate agent, I can't find it. Is it a federal or state law? Leona A., District Heights.
DEAR LEONA: As far as I know, no law limits the amount of closing costs on a property sale. But the Real Estate Settlement Procedures Act (RESPA) requires full, advance closing cost disclosure to buyers of one- of four-unit buildings.
The mortgage lender must itemize for the buyer in advance all settlement costs. This permits the borrower to shop around for (a) cheaper mortgage, (b) cheaper attorney, if any, (c) cheaper settlement costs, and (d) cheaper miscellaneous other costs.
A special HUD-approved form is used to list closing such as title insurance, title search, attorney fee, loan orginiation fee, real estate commissions, tax and other pro-rations, and transfer fees. Buyers are also given a booklet describing closing costs.
RESPA disclosures have greatly cut down on illegal kickback fees. But the lender's processing costs have risen so, naturally, the added expense is included in the cost of higher loan costs. No specific fee can be charged by the lender for preparing the RESPA disclosures.