Home seller's tax break on duplex is more complicated

 
 
Posted2/6/2016 1:00 AM

Q. I have owned a two-family duplex since 1990 and have it on a 27.5-year depreciation schedule. I lived in it from 2000 to 2002 (over two years.) It is listed in my name and my first wife who is deceased. Should I remove her name?

My second wife and I currently own and live in a different home. She lived there with her first husband (deceased) since 1975. It is listed in both of our names.

                                                                                                                                                                                                                       
 

If we were to sell our current home and move into one side of the duplex for a minimum of two years, would I qualify for "no capital gains" status when I sell it?

Would my wife (or both of us) have to use the one-time exemption when we sell our present home before moving into one side of the duplex? Any help you can give me will be greatly appreciated.

A. First off, that home sellers tax break is no longer one-time only. It can be reused on the sale of a different residence, as often as every two years. It allows you to avoid capital gains tax on a profit of up to $250,000 (twice that for a married couple) on the sale of your own home.

Your wife's been in her house more than long enough, so if you have also lived there at least two of the five years before it's sold, the profit should be tax-free when you sell.

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Then about the two-family: If you folks move into one side and make it your own residence for at least two years before you sell, then yes, your profit could be tax-free except for some small adjustments. But, the IRS will regard the sale of that building as two different transactions, and only one of them would be the sale of your own residence. You could take the home sellers tax break, but only on half of the profit. The other half would count as the sale of rental property and any gain would be taxable.

Calculating that capital gain would be complicated, particularly where past depreciation must be recaptured. You should have professional help with your tax return at that point.

As for removing your first wife's name from the title to that duplex, you don't say how her estate was settled. You may or may not need to take any action when the place is sold.

Q. In your recent column, a reader was concerned about new residents not paying attention to or realizing that there are homeowners association guidelines. I suggest creating a basic list of guidelines that the association could give to every new resident of the community when they move in, in plain, non-legalistic English, perhaps with a few do/don't do images to enhance the message. And I'm sure you can suggest someone to create such material!

                                                                                                                                                                                                                       
 

A. Fine idea, though perhaps someday somebody might sue the association claiming that basic list didn't include some legal twist that was in the original document.

Q. We're about ready to sell our home, moving out of the state, and we've been thinking about doing it with a raffle. We figure our house is worth about $200,000, and if we sold 500 raffle tickets at $400 each, that would do it. Maybe we'd aim at selling more than that. Is there any legal reason why we couldn't?

What would be our costs besides the usual closing costs, and what would the winner be responsible for? I know your advice is probably "see a lawyer" but I already have and nobody seems to know much about this.

A. You don't say where you live. What you're asking about is a form of gambling, and it's illegal in every state except -- I suppose -- Nevada. Elsewhere it might be permissible if you were a registered charity, but even so, you'd face drawbacks.

You ask about costs -- the winner of your lottery would owe income tax on $200,000.

As for your costs -- for starters, you'd have the expense of advertising to find more than 500 people who wanted your exact house. You'd have bookkeeping expenses keeping track of them and holding the money in escrow. I hope you'd have some legal documents giving you the right to return their money if you didn't sell a certain number of tickets, because that's likely to happen.

You might try to avoid the "gambling" aspect by offering the house as a prize for a winning essay or some such, with an entrance fee. Even if that worked, it would involve hiring judges, and extensive advertising and media exposure to find enough entries.

OK, you won't get "see a lawyer." Here's the column's other standard advice: call three real estate companies that are active in your neighborhood, and ask them to send over agents who will discuss putting your house on the open market.

• Edith Lank will respond personally to any question sent to edithlank@aol.com or to 240 Hemingway Drive, Rochester NY, 14620.

© 2016, Creators Syndicate

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