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Credit crisis delaying home purchases
Changes in the housing market can change the nature of home-sale transactions. For instance, before the boom in the home-sale market that began in the second half of the 1990s, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) purchase agreement used by most California REALTORS® included a clause in which the seller warranted the condition of the property.
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Sellers wise to replace exterior door
Q: We are trying to replace a plain, solid-wood, paint-grade, eight-foot outside door on a home we are trying to sell. The old hinges are different from what's common today. I am not sure if this could be changed or not. Do you know what we should do? --Jim E.
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Will plan to avoid capital gains tax work?
DEAR BENNY: My 42-year-old son will move home next month. I am 65 and thinking of downsizing. I would like to place him on the deed when he moves in and after two years, sell my home. Since he is on the deed, will up to $500,000 be tax exempt? I know that there could be problems with this arrangement. Is this possible and what are the drawbacks with this arrangement? –Richard
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Will plan to avoid capital gains tax work?
By Benny Kass
DEAR BENNY: My 42-year-old son will move home next month. I am 65 and thinking of downsizing. I would like to place him on the deed when he moves in and after two years, sell my home. Since he is on the deed, will up to $500,000 be tax exempt? I know that there could be problems with this arrangement. Is this possible and what are the drawbacks with this arrangement? –Richard
DEAR RICHARD: First, what do you mean that you will "place him on the deed"? Will you be selling the house to him, or just adding his name to the deed? If the latter, there are potential tax complications. This would be treated as a gift. The law is quite clear that the tax basis of the person giving the gift (the giftor) becomes the tax basis of the person receiving the gift (giftee).
For example, let's say you bought the house many years ago for $100,000 and now it is worth $500,000. Your tax basis is $100,000, excluding any improvements that you may have made along the way. If you give half of the house to your son, his basis becomes $50,000. If you then immediately sell it for $500,000, your profit is $200,000 (half of $500,000 less your basis). If you have owned and lived in the house for at least two years, you can exclude the entire gain and pay no tax. But your son did not live in the house for two years. His profit is also $200,000, but he would have to pay the IRS $30,000 (based on the current 15 percent capital gains tax rate) plus any applicable state or local tax.
Now let's look at a sale after both you and your son have owned and lived in the house for two out of the five years before sale. You sell it for $600,000. The tax basis for each of you is $50,000. You have thus made a profit of $250,000 each. In this scenario, both of you can claim the $250,000 exclusion of gain and pay no tax.
You have raised an interesting plan, but do the numbers before taking any action.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.
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