IRS revises rule to qualify for home seller's tax break

Q. In 2004 we purchased a condo in Florida. We have rented it over the years and have also spent time in it ourselves.

We are about ready to sell this property. We were told recently by the IRS that we need to live in the property for five years instead of two years before we sell, in order to not pay capital gains tax. Apparently the law changed from the time of our purchase. My husband asked about a grandfather clause and they said that there wasn't any in the new law. Is this accurate?

What if we gifted this property to our five children? Would they then have to pay tax on the gains if they chose to sell the property?

A. It's a refreshing change, these days, to hear from someone who expects a profit on the sale of a Florida condo.

First question: Yes, there are new rules about rental property later converted to your own main home. It must be your own residence for five years before you could qualify for the home seller's tax break. That's in contrast to the usual two years.

Second question: If you give property away, the recipients take over your cost basis along with the property. When the kids sold, they'd owe about the same tax you would, so that's no use.

One really great tax avoidance strategy is to die. Your heirs would get the property with a new "stepped-up" cost basis, value at the time of death. But you may not want to do that.

Is it possible to sell a house with a major septic system problem if you can't afford to get it fixed?

A. Certainly. All you need is to find a buyer who's ready to pay all cash and willing to take on the repair. But if you're asking whether a lending institution would give a buyer a mortgage loan under those circumstances, the answer is no.

You might offer to hold a mortgage yourself, collecting the sale price month by month over a period of years. (If you did that, of course, you'd want help from your own accountant and lawyer in judging whether the buyer was a good risk, and setting up the right paperwork.)

Another solution would be to find a worker who agreed to fix the problem and then wait to be paid from the proceeds of the sale. It would help if you could show you were putting the house on the market at a bargain price for a prompt sale.

What exactly is a "short sale" and what are the pros and cons?

A. When a homeowner is hard up and needs to sell but owes more than the place is worth, sometimes the lender will agree to a short sale. The lender will take whatever the property brings in the open market and record the mortgage as settled, so the sale can go through. For the lender, it is sometimes less expensive than foreclosing and then trying to resell the property.

This allows the homeowner to be free of the house, and it's somewhat easier on a credit record than a foreclosure would be. The disadvantages are that paperwork and negotiations with the lender can be frustrating and time-consuming (at least according to the mail I receive). And sometimes the lender doesn't just forgive the rest of the debt but instead seeks a judgment against the ex-homeowner.

We made an offer on a home using a Realtor. The seller, represented by a Realtor, rejected the offer. Seller delisted the home. Can I approach the seller as a "for sale by owner" now without Realtors? By doing this money could be saved and I believe I can show the seller he would make sufficient money to sell me the home. Obviously, the money savings would be due to the absence of Realtor's commission.

A. The listing contract that homeowner signed probably contained a provision that a commission would be due if the place was later sold to someone who saw it while it was listed. This understanding is usually in effect for a specific number of months after the listing expires.

In addition, there's the question of whether you were simply "working with" an agent, or had signed a contract specifically hiring that person to represent you. If you did, better read your document to see if you might have some responsibility there.

• Edith Lank will respond to any questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (please include a stamped return envelope), or readers may e-mail her at ehlank@aol.com.

2009, Creators Syndicate Inc.