Reading newspaper saves tax on $60,000 sale profit

By Bob Bruss
Special to the News-Sentinel

Dear Bob: We bought our home about 13 months ago. Fortunately, our home has greatly appreciated in market value since then, probably by about $60,000. My husband and I were planning to sell our home this summer. Then I glanced at your newspaper article and suddenly realized how stupid we would be to sell now because we have not yet owned and lived in our home for two years.

You said principal residence sellers who own and occupy their homes an “aggregate” two out of the five years before sale can avoid tax on up to $250,000 profits (up to $500,000 for a married couple filing jointly). By waiting another 11 months to sell, we’ll avoid tax on our $60,000 profit. By then, maybe our home will go up in value even more. Many thanks for your excellent articles. — Margie W.

Dear Margie: I’m always glad to be of service, especially when saving tax dollars. A few readers say I write about Internal Revenue Code 121 too much. But, as your situation shows, it’s easy to forget about Uncle Sam’s generous home seller tax exemption.

To qualify, the home seller must have owned and occupied the principal residence at least two out of the five years before its sale.

Occupancy need not be continuous.

For example, a homeowner can qualify by occupying the residence for 10 months, moving out and renting it to tenants for three years, and then moving back in for an additional 14 months before selling.

Also, both spouses need not hold title. However, to claim up to $500,000 tax-free principal residence sale profits, both spouses must meet the two-year aggregate occupancy test.

When two unrelated co-owners sell their primary residence, they both must meet the aggregate two-year ownership and occupancy tests.

If your reason for selling your principal residence after less than 24 months of ownership and occupancy is a new job location (at least 50 miles further away than your present job site), health reasons, or “other reasons” (hopefully, to be announced soon by the IRS), then a partial tax exemption is allowed.

For more details, please consult your tax adviser.

Dear Bob: Many years ago, my wife was deeded two acres of undeveloped land that has been in her family since 1926. Because the property taxes have risen, we feel it necessary to sell this land.

A family member attempted to view this property but was prevented from doing so by a "caretaker." The relative reports someone has cut a road across the property. A local real estate broker was contacted to look into selling the property. They reported they cannot list it for sale because it cannot be shown. They estimated it is worth about $5,000 per acre. What should we do? — William H.

Dear William: Vacant land holdings should be inspected at least annually to prevent someone from acquiring a prescriptive easement (as might have happened to your wife’s land) or lost title to the entire property by adverse possession.

Your family member’s report of a road over your wife’s land should have set off alarms to immediately inspect the property.

After inspection, you might want to contact a nearby real estate attorney for recommendations.

If the parcel is landlocked, before attempting to sell it an easement by necessity will be needed over an adjoining parcel to a public road.

Before listing the land for sale, you might want to obtain a professional appraisal so you know its approximate fair market value.

A survey might also be needed to determine the exact boundaries.

Dear Bob: I recently made an offer to buy a condo and gave my real estate agent a $2,500 earnest money deposit to be held in escrow. After my offer was accepted by the seller, I had a professional inspection made. It revealed many problems with the condo. I decided not to proceed with the purchase and informed my realty agent in writing of my sales cancellation.

Over a month has elapsed, and my $2,500 deposit has not been refunded. I am told the seller (who is an attorney) refuses to release my deposit. What recourse do I have other than hiring an attorney to sue? — Lucia B.

Dear Lucia: Your first step is to write a polite refund demand letter to the seller, the realty agent and the escrow firm holding your deposit.

Because you promptly canceled the purchase contract since you did not approve the professional inspection report contingency, you are clearly entitled to full refund of your $2,500 deposit. Set a deadline for receiving the $2,500, such as 15 business days.

Your second step, if you don’t receive the deposit refund by the deadline, is to file a breach of contract lawsuit against the seller, realty agent and escrow firm for refund of your $2,500.

Fortunately, this is well below the small claims court limit in your state, so you won’t need an attorney.

Filing the lawsuit will probably be sufficient to get a prompt refund because I'll bet that attorney doesn’t want a court judgment showing up on his credit report.

Dear Bob: I am 72, my wife is 78. We want to preserve our home and pass it on to our son. How can we deed it to him now to protect it from the state if we have to go to a rest home? — Bobby B.

Dear Bobby: There are many possible complications to the too-common situation you describe.

Greatly simplified, if you deed away your home and within three years you enter a convalescent home under state Medicaid (Medi-Cal in California), the state can file a claim for the costs of your care against whoever received title to your home.

A major problem of giving your home to your son now is, as a donee, he takes over your low cost basis.

This could prove very expensive for him, tax-wise, when he sells your home. Please consult an attorney experienced with Medicaid to discuss your alternatives.

Dear Bob: My family plans to buy a single-family house in a neighborhood of residential zoning. We assume this means no boarding houses, drug and alcohol rehabilitation houses, etc. However, we hear from friends that the city has allowed such uses without even notifying the neighbors.

If so, what good are the zoning laws? Will the real estate broker be obligated to notify prospective home buyers there is a nearby residence of, for example, recovering drug addicts? I am concerned for the safety of my children. — Richard W.

Dear Richard: You raise a very difficult issue. State law prevails over local zoning ordinances.

What you consider an adverse use, such as a halfway house for recovering drug addicts, might be considered desirable by their friends and family.

Real estate agents are not required to research and disclose nonconforming uses that comply with state laws allowing exceptions to local zoning. Examples include child day-care homes and convalescent residences for the elderly.

Neither must a real estate agent disclose, even if known, that a convicted child molester lives nearby (this is called Megan’s Law, which requires local police departments to disclose such information but takes the disclosure burden off home sellers and realty agents).

Dear Bob: Twelve years ago we bought 14 acres of vacant land out of state. We planned to move there and build a retirement home. But our plans have changed. We paid mortgage payments for 10 years, plus annual property taxes. We were told we cannot deduct these expenses on our income tax returns, as there was no residence on the land. A local realty agent there says we can get $110,000 for our land, which cost us about $30,000. If we sell, can we get a break on the taxes, or should we wait to sell until we retire? — Sharon C.

Dear Sharon: Because you neither lived on the property, nor rented it, your mortgage interest and property taxes paid must be capitalized and added to your $30,000 cost basis. This will reduce your taxable capital gain if you sell.

However, because this is investment property, you can make an Internal Revenue Code 1031 tax-deferred exchange for another investment property of equal or greater value, such as land, apartments, offices, commercial property or even a rental house.