How federal capital gains tax works

Posted3/20/2012 1:20 PM

Q. I built my house in 1988, and as of 2010, I've paid it off. I'm looking to sell and wondering if the capital gains tax break is still in effect.

I think I read in one of your columns from a couple of years ago that the old once-in-a-lifetime law is no longer in effect and that the IRS doesn't care how old you are or whether you buy a replacement house. Several of my co-workers disagree and keep telling me I will have to pay capital gains tax. Please settle this once and for all.

A. Once and for all: if you have owned and occupied the place as your principal residence for at least two of the five years before you sell, you can take up to $250,000 in profit free of federal capital gains taxes (twice that for a married couple filing jointly). The only other requirement is that neither you nor your spouse, if you have one, has used this tax break on some other home within the preceding two years.

People often get confused by that "two of the five years" bit, so think of it this way: You must have made the place your main home for at least two years recently. How recently? Within the past five years.

At any rate, it sounds as if you're fine.

Q. I have a very large, very nice house, tax-assessed at about $500,000, with $63,000 remaining on the mortgage. However, after two recent deaths in the family, it's far too large and expensive for me to maintain alone. I tried without success to sell it in 2009, and now I think I won't be able to sell it before 2013.

Last summer, I approached my mortgage lender about reducing my monthly payment to cover just the interest and escrow (for taxes and insurance) until I could sell. The lender agreed. That reduced my payment from about $2,000 to $950. That reduction ran out in February, but I still can't pay the full amount.

My question is whether I'm running the risk of foreclosure by simply continuing to pay the lower amount. The lender's collecting a handsome 5.75 percent profit, so it seems to me they are better off continuing to collect the high interest instead of foreclosing.

Some suggest that I should turn to a reverse mortgage, but I am adamantly opposed to that. For one thing, I consider them borderline scams. Most importantly, I truly want to sell and buy or rent something more appropriate. I am tired of using all of my physical and financial resources to care for a 12-room house and a half-acre of land.

A. If you can't make any new arrangement with your lender, then yes, you risk foreclosure if you don't make full payments. But why on earth are you holding onto a big house that's become a burden? Don't tell me you couldn't have sold it in 2009. If you'd offered it for $2, it would have sold in five minutes. And somewhere between $2 and whatever you were holding out for was a price that would have produced offers from buyers.

At this point, your comfort is more important than waiting for the real estate market to catch up with whatever price you have in mind. Call three different real estate brokerages and ask them to send someone out. Average the sale prices they recommend. Then list a bit below that with the agent with whom you feel most comfortable.

If, on the other hand, you're determined to remain for now, you can reduce your monthly charges by refinancing. It should be easy to borrow $63,000 when you have so much equity, and at today's low rates, you'll have a more manageable monthly payment.

A reverse mortgage is definitely not a scam, by the way. It can allow financially strapped seniors to remain in their homes. I agree, though, that it's not appropriate for someone like you -- someone who wants to get out from under a house you no longer need.

Reader's comment: In a recent column, you included a letter from a broker who suggested that somebody wanting to "dispose of some vacant land" could offer it to his neighbor. Depending upon the amount and nature of the vacant land, he could instead offer it to his local land trust.

Land trusts are committed to preserving and protecting natural spaces. This way, the original landowner can ensure that his property remains as it is in perpetuity, while transferring ownership to somebody else who will take care of it.

A. Thanks for an excellent suggestion.

• 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

2011, Creators Syndicate Inc.

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