DEAR GINNY: Regarding the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a married couple), we own two houses for which we meet the 24-out-of-last-60-month ownership and occupancy requirement on both. One house is now listed for sale. When it sells, we would like to move into the other house and sell it within the next several months. If we sell one house in 2006 and the other house in 2007, can we claim the IRC 121 exemptions on both houses? –Bonnie H.
DEAR BONNIE: No. But it sounds like you understand IRC 121 quite well. To qualify for the principal residence sale tax exemption up to $250,000 (up to $500,000 for a married couple filing a joint tax return) you must own and occupy the home at least 24 of the last 60 months before its sale.
However, this tax exemption can only be used once every 24 months. When you sell one qualified house in 2006, then you can’t use the IRC 121 exemption again on another home until at least 24 months later. For full details, please consult your tax adviser.
MUST BOTH SPOUSES’ NAMES BE ON TITLE TO RESIDENCE?
DEAR GINNY: My wife and I have lived in my house for more than the required 24 months to claim the Internal Revenue Code 121 tax exemption. But only my name is listed on the title as the owner. I owned the house before we married. Does her name need to be added to the title to make us eligible for the $500,000 exemption? –Arnold S.
DEAR ARNOLD: No. There is a specific clause in IRC 121, which says that for a married couple, title to the principal residence can be held in the name of one spouse alone but each spouse is entitled to a $250,000 exemption if (1) the 24-month ownership and occupancy test within the last 60 months before sale is met by each spouse, and (2) if they file a joint tax return in the year of home sale. Please consult your tax adviser for more details.
PROBATE IS NECESSARY UNLESS TITLE IS IN JOINT TENANCY OR A REVOCABLE LIVING TRUST
DEAR GINNY: My 82-year-old mother owns her modest home, which is probably worth around $100,000. Title is in her name alone. I have showed her your articles about the benefits of holding title in a revocable living trust to avoid probate and in case she gets Alzheimer’s disease or a severe stroke. But she is very stubborn and thinks because she has a small estate, worth less than $600,000, she doesn’t need a living trust or even a will. I am her only heir. As her health is declining, is there any other way to avoid probate when she dies? I have heard horror stories about probate costs and delays –Maurice H.
DEAR MAURICE: A few states have probate court exemptions for small estates but your mother doesn’t appear to qualify. I don’t know where the $600,000 amount came from, but there is no probate exemption for estates below that amount.
The two primary ways to avoid probate of estates are (1) hold real estate title in a joint tenancy with right of survivorship, or (2) hold title in a revocable living trust.
Especially since your mother doesn’t have a written will, after she dies probate court proceedings will be required to distribute the estate according to the state law of intestate succession where she lives. At a minimum, probate court proceedings take six months, often much longer.
LOTS OF DISADVANTAGES TO HOME ON LEASED LAND
DEAR GINNY: I am considering buying a manufactured home on a quarter-acre parcel in a retirement community. These homes are very nice and much less expensive than comparable “stick built” houses nearby. The big drawback my wife dislikes is they are located on leased land, and there is no option to purchase the lot. But the land lease extends for 49 years. I like the adjoining golf course, nearby shopping, and low cost. Is the leased land a serious problem? –Henry R.
DEAR HENRY: Yes. Listen to your smart wife. Just as you are questioning the advisability of buying a manufactured home on leased land, you can be sure when you are ready to resell your buyers will also hesitate.
Presuming you can obtain a mortgage (some lenders refuse to lend on manufactured homes located on leased land), as the lease gets closer to its 49th year, your manufactured home will become worth less and less. After the 49th year, its ownership will revert to the landowner.
You and your wife probably won’t be around in 49 years, but your heirs won’t have much to inherit if only a few years remain on the land lease when you pass on. Other than the lower purchase price, nearby shopping and golf course advantages, I see lots of disadvantages to that situation.
BUYING A HOME WILL INCREASE TAKE-HOME PAY
DEAR GINNY: I am a single mom, with one son, getting ready to buy my first home in June 2007. I am a schoolteacher claiming two withholding exemptions on my W-4. But my real estate agent told me I could increase my withholdings to increase my take-home pay to help me make the mortgage payments (which will be about $300 per month more than I now pay in rent). How soon before I actually buy in June should I do this? –Ms. B.Y.
DEAR MS. B.Y.: I suggest you wait to change your withholding exemptions until after you file your 2006 income tax returns by April 15, 2007. Then you will have a better idea of your income tax situation.
You can probably increase your exemptions (thus lowering the amount of income tax withheld from each paycheck) by one or two to help compensate for your mortgage payment beginning in June 2007. For details, please consult your tax adviser.
IF YOU DON’T EXCHANGE, YOU WILL OWE TAX ON INCOME PROPERTY SALE
DEAR GINNY: I live out-of-state but own a rental property near San Francisco. I want to sell this property and pay off my home mortgage. If I sell the rental property in 2006 or 2007 without doing an Internal Revenue Code 1031 tax-deferred exchange (I don’t want to be a landlord any more), will I owe both federal and California capital gains tax? Also, what would be the advantage of waiting until 2008 when the tax law will allow for one year with no capital gains taxes? –Jill J.
DEAR JILL: Because the rental property is not your principal residence, you will owe capital gains tax (currently at a 15 percent maximum federal tax rate, plus applicable California tax). In addition, there is a special 25 percent federal depreciation recapture tax rate. The fact you want to use the sales proceeds to pay off your home mortgage is irrelevant.
There is no capital gain tax exemption if you wait to sell until 2008. You are probably thinking of the federal estate tax exemption if you die in 2008. Unless Congress changes the estate tax law, for individuals who die in 2008 there will be no federal estate tax. Your tax adviser can provide more details.
CLEAR YOUR TITLE NOW OF DECEASED JOINT TENANT’S NAME
DEAR GINNY: My mother and I owned a house together as joint tenants with right of survivorship. She died about eight years ago. But her name is still on the title. Will that prevent me from selling the house? –Craig S.
DEAR CRAIG: Temporarily, yes. In most states, when one joint tenant with right of survivorship dies, all that is required to clear the title is for the surviving joint tenant to record a certified copy of the death certificate and an affidavit of survivorship.
This should be taken care of as soon as possible after a joint tenant’s death. Until you clear the title, you can’t convey marketable title. For details, please check with the local recorder of deeds where the property is located.
GOOD LUCK GETTING REFUND OF TAX LIEN PAID
DEAR GINNY: My wife and I bought our home from my father in 2004. In 2005, we refinanced the mortgage. There was a lien against the title for my father’s income taxes. At the mortgage refinance closing, the attorney told us we must pay the $1,808 tax lien although my father owed it. I have since learned the attorney should have handled it differently by putting the $1,808 into escrow until the tax collector was made aware of the mistake. What are our options to get the $1,808 refunded? –Levin L.
DEAR LEVIN: If the recorded income tax lien had not been paid, title was not marketable and a lender’s title insurance policy would not have been issued.
You can apply for a refund of the alleged erroneously paid tax. But it is usually very difficult to get a tax refund from any government agency. My suggestion is ask your father to pay you the $1,808 income tax he owed so you can forget it.