We plan to sell our home in the next few months. Several real estate agents we have interviewed estimate its sales price should be around $185,000. Will we owe tax on the difference between $185,000 and $136,000 or will the tax be worse than that?
A: Are you sitting down? Your taxable profit is the difference between the net sales price of $185,000 and your $47,000 adjusted cost basis. That's $138,000. If you are in the 28 percent federal tax bracket, your profit tax will be about $38,640.
You have what is called an "excess mortgage." That means your $136,000 mortgage balance exceeds your home's $47,000 adjusted cost basis. This $89,000 excess mortgage is part of your taxable profit, since you already received this money when you refinanced. For further details, please consult your tax adviser.
Q: My wife and I are both 74. We spend about six months each winter living in our Florida home and we spend the summers in our other home where we raised our family of three children.
Now we have decided to live year-round in Florida because the weather is so good and the taxes are so low. But we are concerned about the profit tax on the sale of our non-Florida home.
As you often suggest, we consulted our tax adviser who has prepared our tax returns for the last six years. She says she cannot honestly file our tax returns and say we sold our primary residence.
According to her, to qualify for that $125,000 tax exemption, we must own and live in our principal residence at least three of the five years before the sale. Since we spend about six months annually in each home, we can't qualify. What should we do?
A: Your situation is not so unusual. Internal Revenue Code 121, the "over 55 rule" $125,000 principal residence sale tax exemption requires (1) at least one co-owner be 55 or older on the day of sale, (2) the home was owned and occupied at least three of the five years before its sale, and (3) the owner has not used this tax break before.
You obviously qualify, except for the three out of five years ownership and occupancy requirement. If you can somehow prove you spent at least 36 months out of the last five years in your principal residence, then it qualifies and you can claim the $125,000 home sale tax exemption.
Otherwise, your entire home sale profit is taxable. It appears your tax adviser gave you correct information.
Q: My husband died unexpectedly at age 33 last year in an auto accident. Fortunately, he left me and our 2-year-old son with about $300,000 in life insurance.
I paid off the home mortgage and have put the rest into several mutual funds for our son's college education. I have an excellent job where I can work at home, so finances are not a problem.
My parents advise me to add our son's name as a joint tenant to the title to my house. When my husband died we had title in joint tenancy, so it was very easy to have the title transferred. Do you think I should add our son, Jason, to the title, so if anything happens to me he will be financially well off?
A: No. Please don't add your son's name to the title to your home.
Although your minor son can hold title as a joint tenant with right of survivorship, he cannot convey title. If you should decide to sell the house and his name is on the title, it will be necessary to have a court-appointed guardian to represent his interests. This can become costly.
A better approach is to transfer the title to your house and other major assets into a living trust. While you are alive and able to manage your affairs you will be both the beneficiary and trustee of your living trust. But when you pass on, then the trust assets can go to whomever you designate, such as your son.
Equally important, if you should become incompetent and unable to manage your affairs, the named alternate trustee can manage your assets. Please consult a local estate planning attorney for further details.
(Copyright, 1993, Universal Press Syndicate) Bob Bruss' column appears Sundays in the Home/Real Estate section. His mailing address is: Bob Bruss, Seattle Times Newsroom, P.O. Box 70, Seattle, WA 98111. |
