Two exemptions no longer allowed
Q. We currently live in a big house and also have a rented cabin. We have owned both more than 25 years. Our plan was to sell the house and obtain the $500,000 tax-free profit. Then move to the cabin and live there for two years (two out of the five-year requirement). We would then sell the cabin and again obtain the $500,000 profit tax free.
But I think I read that Congress had quietly changed this, so you could not collect the $500,000 when moving into a rental house.
I think I read you would only be able to claim the difference between the time you bought the rental property (in our case, 25 years ago) and the time you lived in it (which would be two years) thus netting us about 20 percent of the benefit. Can you clarify?
A. Yes, the law has changed. Simply moving into a formerly rented house will no longer allow you to use the full home-sellers' tax exclusion on the profit from a sale, even after two years of occupancy. The new regulation is complicated, involving not subtraction but rather a ratio. Consult a tax professional.
Q. I graduated with my master's degree in social work and just got a job making $40,000. I wasn't planning on buying until I ran across a foreclosure that seems like a great deal. Built in 1970, this two-story home is 3,300 square feet, and it has a fireplace as well as an extra kitchen in the playroom. It needs remodeling, though. It's in a nice neighborhood, and I made an offer for two-thirds of what they're asking. Should I take it, remodel it and resell it?
A. You didn't ask about financing your project, so we'll assume you already know that can be arranged. You also don't mention the selling prices of similar houses in better condition in that neighborhood. What has a contractor estimated it will cost to put the place in shape? Will you have leisure time to supervise?
Have you investigated the legal and other costs of buying and selling? Do you know the expenses in holding the property while you renovate and put it on the market (interest on your investment, property taxes, insurance, utilities)?
Gather all the figures and take them to a CPA for analysis. Then you'll be in a much better position to decide. If you're going to be a real estate investor and especially if you're buying a foreclosure you need your own attorney as well, lined up ahead of time. You write “shall I take it?” but if your offer was in writing, and if it's accepted, you may no longer have any choice in the matter anyhow.
Q. In the newspaper, it said you would respond to questions. I have a little house. I'm 55 years old and single right now. I want to leave my house to my only son, but I don't want him to have to go through lawyers after I pass. Should I file a beneficiary deed? I know you can also file a trust, but I'd rather not pay a lawyer for that, either.
A. The simplest way may be just to make a will. Trusts do fit some people's situations, but for many others, a trust is complicated, expensive and unnecessary. Don't try to figure this out on your own. A lawyer will know what will meet your needs best. You can always ask ahead of time how much it might cost to draw up an uncomplicated will. And don't worry about your son in the future. Most states offer simple procedures for settling small estates.
Q. I'm executor of my mother's estate. The home needs to be sold, but it really needs a new roof. My credit is not good enough to get a loan to have it done, and banks will not loan with the roof in its current condition. No money is in the estate or available from my two sisters. Any suggestions as to proceed?
A. You need an all-cash buyer, someone who wants to fix up the house on his or her own. Call several real estate companies. Ask them to send someone over to look at the place and give you advice. They will know how the property can be sold at a bargain price for cash. Then list the house on the market with a broker with whom you feel most comfortable.
Another possibility is to lend the money to a buyer yourselves, taking back a mortgage to collect the purchase price over a period of years. That can be tricky, though, and I wouldn't recommend it in your situation.
Ÿ Edith Lank will respond to 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.
$PHOTOCREDIT_ON$ 2010, Creators Syndicate Inc.$PHOTOCREDIT_OFF$