Q: Last July I put $2,000 earnest money down on a condominium in a western state, as I planned at that time to retire at the end of 1979 and move. However, I've decided not to retire. When I notified the real estate agent who negotiated the mortgage, she said I probably won't be able to get my $2,000 back.
If my deposit isn't returned, do I have any recourse, or is this what to expect under the circumstances? Do I owe the agent anything for the time she spent negotiating both the mortgage and the extension of my closing date, since she will lose the commission on the sale? Would the $2,000 be deductible on my income tax return?
A: Whether you're entitled to the return of your deposit and whether you owe the agency any fee should depend on the wording of the agreement. Check that agreement. If it's not clear to you, you may want to consult an attorney. The $2,000 isn't deductible on your income tax return, according to Internal Revenue Code Section 165 (c) .
Q: I have a real estate question that I have tried unsuccessfully to have answered by the Internal Revenue Service and various real estate agents. I want to sell my house, which is valued at $150,000, and buy a house with an apartment in the basement for the same amount. May I buy a house for say, $130,000 and immediately create a rental unit with the other $20,000 and consider the buying price $150,000? In other words, can immediate improvements be considered part of the purchase price?
A: Under Internal Revenue Code Section 1034 and Internal Revenue Regulation 1.1034-1 (c) (3)ii, you're precluded from counting the cost of immediate improvements as part of the purchase price in deferring tax on gain in the sale of your former "principal residence."
Moreover, in your case, since the improvements are to be used as income-producing (investment) property, you'd be limited to the amount of the selling price that could be reasonably apportioned to part of the house you occupy as a principal residence. The tax deferral provision applies only to your principal residence -- both former and present. You may be able to accomplish tax deferral in your case, however, if the present owner makes the improvements and then sells the house (your new principal residence) for an amount that equals or exceeds the adjusted cost basis of your former house.
Q: Should I take depreciation on residential rental property? If I don't take it, in my opinion, my gain on sale would be less and I'd have less income tax to pay.
A: If you don't take allowed depreciation each year, under Internal Revenue Code Section 1016, the IRS will require you to recompute the gain on sale as though you had taken depreciation, you almost certainly will increase the income tax you'll have to pay each year.
Q: I recently bought an older house as an investment and rental unit. I have two questions. First, where can I get information on acceptable life factors for component depreciation? Second, how do I determine what proportion of the value of depreciable improvements and land can be attributed to the depreciable improvements?
A: To get acceptable life factors for component depreciation of your improvements, write the Office of Industrial Economics, Treasury Department P.O. Box 28018, Washington 20005, and ask for a copy of "Business Building Statistics." A Treasury Department source tells me that the life factors of residential dwelling components set out in that study (done in 1971) are acceptable to the IRS.
To get your depreciable improvements value as a proportion of the value of both the depreciable improvement and land (non-depreciable), the IRS will probably find it acceptable if you use the same proportion that the government assessor used. You can get these figures by calling or visiting the assessor.
To use those proportions (or ratio), you can compute the value of your depreciable improvements. If you want to be doubly certain, you can retain a qualified appraiser to determine the value of the depreciable improvements (and the land, as well).