QDEAR BOB: I am getting a legal separation from my wife, but I want my children to remain in the family home. Then my wife and I will sell the house after the children are grown. I will not be living there at that time. Will I lose my $250,000 principal residence sale exemption? -- Douglas R.
ADEAR DOUGLAS: If you and your wife have a written legal separation agreement or a divorce agreement providing for sale of the principal residence at a future time, such as when the youngest child becomes 18 or 21, you can each qualify for up to $250,000 of tax-free principal residence sale capital gains under Internal Revenue Code 121.
To qualify, the spouse who is living in the principal residence must have owned and occupied the home at least two of the five years before its sale.
Although you will be the spouse who doesn't meet this occupancy test of IRC 121, since you would be legally separated or divorced at the time of the home sale, you can still qualify for up to $250,000 of tax-free capital gains if you are on the home title at the time of its sale. Consult a tax adviser for details.
DEAR BOB: About 10 years ago, my mother transferred title to our family house in Vermont to my name. She retained a life estate, but recently she had a stroke and has moved to live with us. Now she wants us to sell the house. What are the capital gains tax implications? Our asking price for the house is about $100,000 higher than the value listed on the deed when she put the house into my name.
-- Mike R.
DEAR MIKE: The market value of the house at the time of the gift to you is irrelevant to your situation. When your mother gave the house to you, you took over her lower adjusted-cost basis. When the house sells, you will owe capital gains tax on the difference between your adjusted sales price (net after sales expenses) and your mother's adjusted cost basis.
That amount will be at least $100,000. If your mother hadn't made that gift to you, her capital gain up to $250,000 would have been tax-free, thanks to Internal Revenue Code 121. That's presuming she owned and occupied her principal residence at least two of the five years before its sale.
Because she deeded the house to you, you have to pay capital gains tax on the sale. If your net capital gain is $100,000, that is a $15,000 federal tax, which could have been avoided.
DEAR BOB: Suppose a person owns a house in his name alone with no mortgage. His bank accounts say "In trust for . . . " a son. When he dies without a will, what happens to his house? What exactly does the probate court do and look for? -- Barbara T.
DEAR BARBARA: When a person dies without a will, his estate assets must go through probate court, usually involving unnecessary costs and delays. The state law of intestate succession determines which relative receives the assets. If no relatives can be found, the assets "escheat" to the state treasury.
The fact a deceased individual's bank accounts are titled "In trust for . . . " a son has nothing to do with who inherits the dead person's other assets.
This situation reminds us why everybody needs a written, valid will to distribute assets after death. Otherwise, state law determines who receives the deceased's assets.
Better yet, major assets such as a house and other real estate should be held in a living trust to avoid probate costs and delays. Consult a lawyer for details.
DEAR BOB: You have often explained the stepped-up real estate basis valuation at the date of a property owner's death, or alternate date used by the estate. The comparable sales prices near the date of death for an inherited home average $459,000. However, three months after the death, the house sold for $600,000. How can I use an "alternative date" to reflect a more realistic stepped-up basis? -- John J.
DEAR JOHN: I presume you are the heir who inherited the property with a stepped-up basis. It is up to the estate executor to determine if an "alternate date" for valuation of estate assets is desirable for the estate. This usually occurs in a declining market.
If there was no alternate date used for valuation by the estate, then the date-of-death valuation is usually used to determine the heir's new stepped-up basis to market value. Consult a lawyer for details.
DEAR BOB: In March 2004 I signed a pre-construction contract to buy a condo and I made a 20 percent down payment and closed on my purchase in March 2005. I will sell the condo in July 2005 at a substantial profit. Will my profit be taxed as a long-term capital gain (16 months between signing purchase contract and the sale date) or short-term (four months between closing and sale) capital gain? -- George M.
DEAR GEORGE: Because you have held title only four months before selling the condo, your profit is taxed at the short-term ordinary income tax rate. The date of signing the purchase contract is irrelevant to your situation. What matters is the date you took title.
DEAR BOB: I have been in escrow since April 24, 2005, to buy a house, but the seller's mortgage lender refuses to waive the pre-payment penalty on her loan and will not allow the sale to close. I have met all my financial obligations as the buyer. What should I do? -- Annie B.
DEAR ANNIE: I presume your seller refuses to pay the pre-payment penalty and you really want to own that house.
If I were in your situation, I would consult a local real estate attorney to file a specific performance lawsuit to enforce the purchase contract with a recorded "lis pendens" (that means title litigation is pending) against the title.
Such a lawsuit protects your legal right to buy the home and effectively prevents the seller from selling to another buyer, perhaps at a higher price, or refinancing the mortgage. If the case goes to trial, the court can order the seller to deliver the deed, including paying the pre-payment penalty, which is not a valid excuse not to honor your sales contract.
DEAR BOB: My Aunt Sally quit-claimed her property to herself and my sister Karen in 1981. However, the deed was never recorded. Sally passed away in 1982. Is it too late to record the deed now? -- Serge A.
DEAR SERGE: If the quit claim deed is in proper recordable form, and Aunt Sally's signature was properly notarized, it is up to the local recorder of deeds to determine if an old deed is recordable under state law where the property is located.
If the recorder of deeds refuses to record the deed, your sister Karen should bring a quiet title lawsuit in the jurisdiction where the property is located to determine her rights to the property. The court will also consider the rights of whoever inherited Aunt Sally's interest in the property.
DEAR BOB: My wife and I sold our home in 1993. We bought it for $93,500 and sold it for $200,000. We did not pay any capital gains tax because we used the $125,000 "over 55 rule" exemption. We bought our current retirement home the same year for $131,500. Now we want to sell our retirement home for its market value of about $325,000. Can we use the $250,000 tax exemption so we don't have to pay any capital gains tax, although we previously used the $125,000 exemption? -- Glenn B.
DEAR GLENN: Yes. When you sold your home in 1993 for $200,000, you had a capital gain of $108,500 ($200,000 minus $91,500).
Under the old, now repealed pre-1997 Internal Revenue Code 121, called the "over 55 rule," you were entitled to claim up to $125,000 tax-free profit. Presuming you were over 55 and qualified for that tax break, you owed no tax on the sale of your previous home.
Then you bought a less-expensive principal residence costing $131,500, which you now plan to sell for $325,000. That's a handsome net profit of about $193,500 on which you want to avoid paying capital gain tax.
The current Internal Revenue Code 121, enacted in 1997, allows use of the $250,000 principal residence sale tax exemption (up to $500,000 for a qualified married couple filing jointly) on your capital gain from the current home sale. Your ages don't matter.
To qualify, you must have owned and occupied your principal residence at least 24 of the 60 months before its sale. You appear to qualify. Your prior use of the old, now-repealed IRC 121 does not prohibit you from using today's far more generous tax break. Consult a tax adviser for details.
DEAR BOB: You recently said when a house title is held in a living trust, if one co-owner becomes incapacitated, the other trustee can make decisions concerning the house. If there were no living trust, wouldn't a general power of attorney for financial affairs accomplish the same result? -- Jerome G.
DEAR JEROME: My experiences with powers of attorney in real estate transactions have been that the title insurance companies insist on verifying the principal is still alive and understands the transaction.
For example, I vividly recall a transaction where the title insurance officer made a long-distance phone call to Sri Lanka to talk with the power-of-attorney grantor. She verified his identity and that he understood the transaction documents his attorney-in-fact sitting across the desk was signing on his behalf.
If title insurance cannot be obtained, most buyers and lenders refuse to proceed. A living trust is usually much better than a power of attorney. Consult a lawyer for details.
DEAR BOB: What happens to my rental property accumulated depreciation after I die and my children inherit my property?
-- Paul W.
DEAR PAUL: They will inherit your rental property with a new "stepped-up basis" to market value on the date of your death. Uncle Sam will forget all about the depreciation tax deductions you claimed. Isn't he nice? Consult a tax adviser for details.
DEAR BOB: Is there any place you recommend for obtaining lists of foreclosures in my area? I have asked local real estate attorneys and title insurance people, but they don't seem to know -- Kirk W.
DEAR KIRK: There is no nationwide foreclosure information source with local information. The best Web site I've found is www.foreclosures.com, run by Tim and Alexis McGee. They provide wonderful resources and include referrals to local foreclosure information sources in most states. Another resource is www.realtytrac.com. They seem to have reliable foreclosure information, although not nearly as extensive.
DEAR BOB: After reading several letters in your column about joint tenants with right of survivorship, I checked the deed to our home. My husband and I own it as "tenants by the entireties." Is this the same as "joint tenants with right of survivorship?" -- Karen B.
DEAR KAREN: Not exactly, but it's better. As you probably know, when a joint tenant with right of survivorship dies, the remaining joint tenant(s) automatically received the deceased joint tenant's share without probate. The deceased joint tenant's will has no effect on his or her joint tenancy assets.
However, about half of the states allow a special form of joint tenancy between a husband and wife. It is called "tenancy by the entireties."
This special ownership form is better than joint tenancy. The reason is the signatures of both spouses are required to transfer title, refinance or make any title changes.
By contrast, in most states a joint tenant can convey his interest without the approval of the other joint tenant(s).
For example, a joint tenant can break up a joint tenancy by conveying their share by a quit claim deed from herself to herself as a tenant in common. The other joint tenant(s) need not be notified. The result is when such a tenant-in-common dies, his property share becomes subject to his will. Consult a lawyer for details.
Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.
(c) 2005, Inman News Service