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updated: 7/10/2014 2:34 PM

Capital gains questions for sale of rental home

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Q. I have written to you before, so now for the rest of the story. I finally sold my rental home to my longtime tenant of 18 years in April. How can I limit my capital gains tax? How is it figured? If I have to pay, what is the percentage?

Our income is just Social Security and my husband's retirement account, so it's very low. What should I do now? Please answer in words I can understand and not government gibberish. Do I need to make timely estimated tax deposits every three months?

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A. Every real estate investor should have a CPA. I figure if you're writing to me, either you've been doing your own taxes, or more likely you just don't like the information you're getting from your accountant. I'm afraid there's no way to answer your questions without -- yes -- sounding like government gibberish.

After all this time, your original investment in that property must be almost or fully depreciated. With your 2014 return, not only your profit is subject to capital gains tax. You must also "recapture" (pay tax on) the depreciation you claimed as a deductible expense -- or could have claimed -- all these years. (If you haven't been claiming depreciation, it may pay to amend your past few returns.)

The capital gains rate will depend on your tax bracket. For 2014, your income won't be that low, because it will include that gain from the house's sale as well as your retirement funds. If you took back a mortgage as part of the sale price, the principal you receive will be handled differently from the interest.

Without knowing the figures involved, there's no way I can tell if you need to make quarterly estimated payments, but I'm pretty sure you do. Yes, it's complicated, and that's why you need professional help. If you have a CPA, trust him or her. If you've been trying to get along without an accountant, consult one immediately, and be sure to take along copies of your past tax returns.

Q. We received a seller's disclosure statement for a house we are eyeing in another state, Maryland. The agent sent us the five-page disclosure statement. The first page was boilerplate. Second, third and fourth pages were crossed out -- one large X across each page. The fifth page only disclosed that the dishwasher doesn't work.

What should we do about this? We cannot easily get to Maryland to inspect the house. Doesn't the seller have an obligation to fully disclose, especially as the house was built in 1980?

A. What does the seller's agent say about this?

If the owner doesn't want to make any statements about the condition of the property, you can always say that, in that case, you're not interested. Or, if you still want to make a written purchase offer, you can include a provision -- it's pretty common and there should be standard wording -- that the deal is contingent (dependent) upon your receiving a satisfactory report from a licensed home inspector within a certain amount of time. You would then hire and send in your own inspector.

If you didn't like the report you received, you should have the right to void the contract and receive the return of your deposit. Or you could try to renegotiate the deal, requiring either certain repairs or a concession on the purchase price.

If you plan to place a mortgage on the property, your lender might also require some repairs before you could receive the loan.

Q. My wife and I are in our early 70s with two adult children, 36 and 40, both single and living with us. One is underemployed; the other has not worked in more than two years. Neither is good with money and home maintenance and judgment issues. We also have grandchildren with us halftime. My wife and I plan, in two or three years, to sell and move to an independent living community. Our question is what kind of modest living arrangement is the best of our not-very-good alternatives and should it be a rental or purchase and how is any lease or purchase titled? We are willing to finance much of this but want to limit our liability.

A. I'm afraid it's not clear what you're asking me, or how the children and grandchildren figure in your plans. I'd suggest a session with a lawyer who specializes in estate planning or elder law. You may also find some guidance about choosing a retirement community at your local senior center, Office for the Aging or whatever your town's senior services office is called. Sorry I can't be of more help -- good luck!

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

© 2014, Creators Syndicate Inc.

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