Death And Taxes: Not Always Inevitable

Death And Taxes: Not Always Inevitable

Death And Taxes: Not Always Inevitable

Question. My husband recently died of a massive heart attack, leaving me a widow at a young age. I was thrust into a new life status that was not my choice or my desire. I believe I am being penalized for something that has already devastated my life in many ways.

We were fortunate to have invested wisely in our principal home many years ago, and have made more than $250,000 in profit. I want to sell, and it now appears I will have to pay the tax on any profit over $250,000, since I no longer file a joint return. If couples are making the life choice to divorce, they can sell their home prior to the divorce and get the $500,000 exemption recently enacted by Congress. A widow has no option or choice in the change that has happened in her life.

Please advise me how I should proceed; I need the money for my future more than the government.

Answer. It has often been stated that two things are inevitable: death and taxes. However, there is a measure of hope based on an often forgotten concept in the tax law known as the “stepped-up” basis. And, fortunately, this was not modified or repealed under the new tax law that was just enacted.

Oversimplified, this means the value of a person’s real property on the date of his/her death becomes the basis of the person who inherits that property.

Let us take this example: in 1995, you and your husband purchased your first home for $100,000. You took title as tenants by the entireties — which is the common form of ownership for married couples. Your husband died in 2017, and the property was valued at $800,000 on the day he died.

Your basis is as follows:

Initial basis: (half of purchase price) $ 50,000

Inherited (stepped up) basis: 400,000

New basis: $450,000

Please note that since the property was worth $800,000 on the date your husband died, you inherited his half of the property — namely $400,000.

If you sell your property today for $800,000, your profit (before excluding such items as real estate commissions, legal fees and fix-up costs) will be $350,000 ($800,000 – 450,000). As you correctly pointed out, since you are now filing a single tax return, under the current tax laws, you are entitled to completely exempt the first $250,000 of this gain. Once again, Congress did not repeal or amend this important homeowner benefit.

Thus, your capital gain tax will be on $100,000 ($350,000-250,000). Because the income tax brackets were changed under the new law, please talk with your financial advisors as to what your tax obligation will be.

However, let’s analyze this even further. Did you and your husband make any improvements to your house over the many years of your ownership? If you put on a new addition, installed a new kitchen, or significantly improved the back yard, all of the costs of these improvements are added to your basis. Thus, if the costs of your improvements were at least 100,000, you will not have to pay any capital gains tax at all.

Furthermore, try to find the settlement statement when you first purchased the property. There were a number of costs which you incurred — title examination, title insurance, legal fees — which can properly be added to basis.

Keep in mind that for every dollar you add to basis, you are going to save from paying capital gains tax. Clearly every dollar can add up to a considerable tax saving.

Although you did not raise this next issue, I want to take the opportunity to comment on a question I often get: should you put your children on title now?

Generally speaking, my answer is no. The reason is the same as discussed above — on your death, your children will get the benefit of the stepped up basis, and indeed under the circumstances may not have to pay any capital gains tax. For example, were you to die when the property is valued at $800,000, if your children sold the property for this price, they would have no gain at all — and thus no tax to pay.

However, if you were to gift them the house now, during your lifetime, their basis for tax purposes would be your basis — i.e., $450,000. The law requires that the basis of the donor becomes the basis of the donee. If they sold the property for $800,000 — and the house was not their principal residence — they would have to pay capital gains tax on profit of $350,000 ($800,000 – 450,000) At the maximum rate, this could be a nice gift to Uncle Sam.

You must, of course, fully discuss these issues with your tax advisors. These are not easy questions, and the answers are even more complex.

So much for “tax simplification.”

 

 

 

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Portability Initiative Is Designed To Help 55 and Over To Sell Their Homes And Buy Another

Portability Initiative Is Designed To Help 55 and Over To Sell Their Homes And Buy Another

Portability Initiative Is Designed To Help 55 and Over To Sell Their Homes And Buy Another

The California Association of REALTORS® (CAR) is attempting to qualify a ballot initiative, The Property Tax Fairness Initiative, that will restructure the way property taxes are calculated for buyers over the age of 55 (and also the disabled and/or natural disaster victims). In many cases REALTORS® are already circulating petitions asking for ballot-placement of the initiative, and, in short order, professional signature-gathering organizations will be engaged as well.

CAR’s approximately 200,000 members have been assessed $100 each in support of the effort; and there are expectations that the Association’s substantial reserves will also be tapped in efforts to support the initiative’s passage.

What would this accomplish and why is it needed? In what follows I will seek to summarize CAR’s answer to those questions. First: the why?

As is well-known, California is currently experiencing a shrinking inventory of housing available for sale. This lack of supply has driven up prices, which makes it extremely difficult — in many cases, impossible — for first-time buyers to enter the market. In many cases, it also makes it difficult for move-up buyers to find replacement property.

There are, no doubt, multiple causes for this, but, no doubt, a major one is this: nearly 75% of California homeowners 55 years of age and older have not moved since the year 2000!

Why? Because of the way property taxes are calculated under California’s Proposition 13. For tax purposes, properties are valued on the basis of purchase price, not current market conditions. (Example: Suppose I bought my house for $600,000 a few years ago; and that my neighbor bought the same model — as identical as can be — in this heated market for $800,000. My tax will still be calculated on $600,000, whereas his will be based on $800,000.)

CAR says, “A large part of the reason why [55 and overs are not moving] is that, even if they want to downsize or move closer to family, the prospect of a property tax increase of 100, 200, or even 300 percent, effectively locks our parents and grandparents in their homes.” Thus, CAR maintains, “…The Property Tax Initiative…will help these homeowners to sell their current homes and move without being subjected to a what is effectively a massive “moving penalty.”

How will it help? By modifying current law to expand the conditions under which those over 55 would be allowed to transfer their current tax base — based on their original purchase price — to a replacement home that they are purchasing.

Currently there are only limited conditions under which someone over 55 may transfer his or her old tax base to a newly purchased home. The Initiative would expand this. “C.A.R.’s Property Tax Fairness Initiative would allow homeowners 55 years of age or older to transfer their Prop. 13 tax base to a home of any price, located anywhere in the state, any number of times.”

CAR’s talking points offer two examples of what would happen if the Initiative should pass.

Buy Up Example

  • Original Purchase Price: $100k
  • Estimate Property Taxes: $1K/annually
  • Existing Home Sale Price: $300k
  • New Home price: $400k
  • New Property Taxes: $2k/annually

The $100k difference between the $300k sales price and the $400k purchase price is added to the original Prop.13 property tax base of $100k for a new Prop. 13 tax base of $200k. The buyer still pays their fare share of taxes but isn’t blocked from making the move.

Buy Down Example

  • Original Purchase Price: $100k
  • Estimated Property Taxes: $1k/annually
  • Existing Home Sales Price: $300k
  • New Home Price: $200k
  • New Property Taxes: 1/3 of $200k = $67k [value] or $670/year for property taxes

If a homeowner buys a less expensive home, the property taxes will be proportionally the same as for the original home. In other words, if the tax base was one-third of the sale price, the new property tax would be one-third of the new sale price. Buying down reduces the homeowner’s annual property tax bill.

Among the objections raised to the Initiative is that it will reduce revenues to local governments. In response to this, CAR says: “The revenue loss is the result of a ‘static’ analysis — it only looks at the revenue lost, not the revenue gained which a ‘dynamic’ analysis would do. All buyers of homes formally owned by a senior homeowner will have the home reassessed to market value and pay property taxes based on the reassessed value.”

Lots to think about. There’s an election coming.

 

 

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Does It Makes Sense To Buy A New House Before Selling The Old One?

Does It Makes Sense To Buy A New House Before Selling The Old One?

Does It Makes Sense To Buy A New House Before Selling The Old One?

You’re interested in moving. You need to sell your old house first before buying a new one, right? After all, you don’t have enough of a down payment for the new house without selling the old one, and you are pretty certain your bank will not qualify you for two mortgages.

You are in a dilemma; houses in your area are currently receiving multiple offers. Inventory is low. Sure, you can sell your house under the same circumstances, but will you be able to identify a new house so that you can simultaneously move from the old house to the new one? Unlikely. Do you sell the current house, move to a rental [or hotel) while you identify and try and close on the new house? Is the extra hassle of moving twice and the added stress of the inability to simultaneously close on the sale and purchase the new worth it? IF you could purchase a new house while still living in the old house, is it worth the added costs involved with having a second mortgage until you sell the old house? How much is “peace of mind” worth in not having the pressure of having to purchase a new house (because you sold the old house too soon)?

These questions are a reality in today’s world in many parts of the country, specifically, the San Francisco Bay Area, because of the real estate rebound after the Great Recession. According to Jeff Stricker, a real estate professional with Alain Pinel Realtors specializing in the Silicon Valley in California, his clients are faced with these exact situations much of the time, as property is swooped up almost as soon as it hits the market, and, many times, with multiple, over asking prices. Jeff states that, although it is great for his clients as sellers, those same clients face challenging hurdles when buying a replacement property; competing against other buyers, some with cash only offers, who are willing to bid up a property far beyond the asking price in many circumstances. Some buyers are just so frustrated with the process of competing and getting outbid that they act in ways that they normally would never have thought. Overbidding. Settling for a house that they may not have originally envisioned. The list goes on.

Jeff, however, decided to think outside the box. What would happen if another house was purchased (without the added pressure of “living out of a suitcase”, if you will) prior to the sale of the old house? Is it even possible with the banking regulations that were placed upon financial institutions as well as homeowners over the past decade due to the “mortgage meltdown” that happened in 2008 and on? Dodd Frank rules that placed inordinate restrictions on the ability of homeowners to obtain financing left many people unable to get loans in which they previously were easily able to qualify.

Jeff decided to come up with a spreadsheet wherein, if he plugged in some assumptions, he could figure out if it would make economic sense to acquire a new house before selling an old house. The other part of the equation was to find a lender who would allow for a homeowner to purchase a new home without first selling the old home; thus, carrying two mortgages at the same time. Since most conventional lenders would not touch this, Jeff had to look to alternative sources. He found a company called Pacific Private Money, in Novato, CA that specializes in such a product.

Pacific Private Money can lend enough to the borrower to purchase the new home if there is enough equity in the old home to justify a combined Loan to Value (LTV) of 70% or less. Sometimes, if there is not enough equity in the old home, the borrower needs to add cash to bring the LTV to 70%, but, the ability to purchase a new home without having to sell the old one first can solve many issues for the homeowner. First, the new home can be identified without adding pressure since the homeowner is still living in the old house until the new house closes escrow. Second, the stress of moving twice is eliminated. Third, and probably the best (and possibly most surprising) is that this solution may actually cost LESS in terms of increasing net equity to the household than selling the old house and buying a new house with the proceeds from the old house (and new mortgage) in most circumstances wherein the new house is more expensive house than the old house.

In a rising market, the earlier the purchase of the more expensive new house and the delay of the sale of the old will increase the net equity to the homeowner more than the costs associated with carrying two mortgages.

For example, let’s assume the old house is worth $1,000,000 and there is currently a 1st mortgage of $200,000. The homeowner desires to purchase a new home for $1,400,000 and has $100,000 in the bank that can be used for a down payment. We will look at two scenarios; the first is where the homeowner sells the current house, rents for a period of time, and then purchases a new home. The second scenario is where the homeowner borrows the money in order to secure the new home while owning the old home.

Obviously, there are many moving targets with both scenarios, such as how much it will cost to rent a place (in the event of selling the old house first) as well as how long it takes to identify and close on the new house, storage costs for belongings, the cost of obtaining a private loan, and the appreciation assumptions for both houses, just to name a few.

Here is a calculation making the following assumptions; it takes nine months to close on a new house after selling the old house; houses in the area (both old and new houses) are appreciating at 1% per month; interest earned on bank deposits are at 1% per annum; storage costs are $1,000 per month, a conventional bank loan is not available because the homeowner does not qualify and has to use a private loan company; the costs for the private loan are 9% plus 2 points; the interest rate on the old house is 3% per annum.

As you can see, in a rising market, where the new house is worth more than the old house, there is a significant benefit to using a private loan to purchase the new home and sell the old home at a later date. Waiting 9 months to eventually acquire the new house has tremendous opportunity costs, as compared to a net benefit of purchasing the new house right away and eventually selling the old house.

Although assuming a 1% per month appreciation of real estate may seem aggressive, the San Francisco Bay Area, and specifically the Silicon Valley, has experienced such growth. However, even if we lower the appreciation to .5% per month, we still see a fairly significant benefit to purchasing the new house now rather than waiting to first sell the old house and then buy the new house.

Aside from the economic benefit, other factors need to be considered; the lack of stress of moving twice should the homeowner decide to sell the old house first and then purchase the new house; what if the homeowner finds the house of his/her dreams now and does not want to let the house slip away? In today’s market, sellers are not willing to take contingent offers. Can the homeowner budget for both houses at the same time while waiting for the old house to sell? Is the market rising? Is the new house more expensive than the old house? How long will it take to sell the old house? These are just some of the issues to consider before deciding one way or the other; however, and this can’t be stressed enough — when a homeowner finds a house they like, they do not want to lose the opportunity of buying it. This means that they can start looking at new houses before putting their old house on the market. This also allows them time to make any repairs or fix up their old house so as to maximize its value prior to putting it on the market.

Once homeowners know that there is a potential to purchase a new house before selling their old house, they can be proactive in obtaining a commitment letter from the lender. Of course, homeowners should see if they qualify for a conventional loan for buying the new house (owning two houses at once), but they should keep their minds open to procuring a private loan should the bank turn them down. Pacific Private Money is such a private loan company.

 

 

 

WRITTEN BY EDWARD BROWN

Home Buyers & Sellers, Pay Attention in 2018!

Pay Attention in 2018!

Pay Attention in 2018!

We may have a tricky year ahead of us, so what’s the best and easiest strategy for consistent success in 2018?

Pay Attention!

Start the year with or without New Year’s Resolutions, but commit to success this year by paying attention:

#1. To how well informed you and information sources you rely on are

#2. To what’s really going on around you — real and fake, and

#3. To how you react to what’s going on around you — online and off.

Whether you are a real estate owner or a wanna-be… whether you intend to buy or sell in 2018, so much is shifting in real estate, in the economy, and everywhere else that nothing should be taken for granted or assumed in 2018. Concentrate on getting the facts not just someone else’s bias view of where advantages lie for you.

#1. A lot changed in 2017 and the full implications of those changes will continue to emerge in 2018.

Pay attention to ramifications and compromises, subtle and otherwise, attached to changes in everything from tax law and net neutrality to technology’s continued re-write and disruption of much we’ve take for granted:

  • Real estate ownership will be impacted by changes to tax law, estate planning, resulting neighborhood development, and interactions between these and many more elements. Where will advantages lie for you?
  • Changes in the business world may directly or indirectly influence job or retirement security for your family. This in turn may impact qualification for financing, mortgage renewal, and real estate affordability. Projected reductions in funding and donations for social and community support programs and organizations may have widespread impact in neighborhoods, community development, and in education. These shifts may reduce location benefits which, in turn, can affect real estate value. How will your location be affected in 2018?

#2. Whoever or whatever you blamed for distractions in 2017 will be with you in 2018 and might even be worse.

There are only so many hours in the day and only so many dollars in your pay check. Distractions that erode concentration on your needs and goals, and distractions that feed impulse spending will be expensive in many ways. Pay attention to what takes you off point, off track, and off goal to ensure you stay in control. You may blame others for distracting you, but it’s your powers of concentration that should be continually honed and improved to keep you ahead of the pack.

  • Saving for a down payment, home renovation, or to pay down an existing mortgage requires a written budget strategy to guide you toward clearly-defined results.
  • Paying monthly condominium fees, mortgage payments, or heating bills is exhausting when approached as month-to-month catch-up. Shift your focus to cutting costs and increasing income long-term and you’ll move beyond a monthly survival perspective to establish a constructive, long-term frame of reference for success.
  • Steady, dramatic increases in online shopping over the 2017 holiday season mean many households may be combining the impulse spending facilitated by credit cards and click-here shopping carts to undermine their budgets even more dramatically than ever. As the volume of online shoppers increases, convenience, cost saving, and product satisfaction may be compromised, so it’s only the novelty of online shopping that addicts. What’s all this got to do with achieving your core real estate ownership goals?

#3. Significant amounts of what you believed you knew in 2017 about real estate, finance, insurance, home security, mortgages, work, and the internet will be out of date in 2018.

Pay attention to which laws, regulations, services, and real estate expenses have actually changed not just been endlessly, sensationally rehashed in the media and online. Accurate information and clever strategies are gold.

  • Tweets, posts, and other online content arrive in increasingly-overwhelming rates and volumes. This leaves less and less time to uncover facts and realities and to actually learn and think about relevance to you. From shopping or applying for a mortgage to searching for a new home or viewing property, virtual video and online content bring these and other real estate activities onto your laptop and your mobile phone. Is this distance-learning leaving you better informed and smarter real estate-wise than face-to-face meetings with real estate experts and hands-on location and property investigations?
  • Searching out professionals who keep up with change within their profession is a challenge. Time pressures leave some professionals parroting what they hear and see in media and online instead of carrying out thorough research themselves. How do you make sure you receive the professional advice you need to interpret changes from your real estate point of view?

Realty Times and my “Decisions & Communities” column will continue to provide you with real estate facts and perspectives that keep you asking more of yourself and the professionals who advise and serve you.

Let’s meet the challenges and opportunities of 2018 head on!

 

 

 

 

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What To Do When Your Home Isn’t Selling

What To Do When Your Home Isn’t Selling

What To Do When Your Home Isn't Selling

When sellers start the home-selling process, no one wants to think “What would happen if my home doesn’t sell?” But before you panic, recognize that there are many things that you can do so you don’t wind up in that position.

Tip 1: Understanding the real estate market and the value of your home will help you avoid this dilemma. The first key point is to get educated about the market. Read your newspapers, online real estate sites, and consult with the best experts in real estate for your area to determine the sales price.

While all that may seem basic, you’d be surprised how many sellers rely on emotion to dream up a selling price for their home. Some have done little, if any, research on even their own neighborhood. Instead, their strong ties to their homes cause them to imagine that their home should sell for the price they want. Or they base the selling price on how much they owe which is, of course, of no significance to buyers.

Tip 2: Fix up your home. Most buyers don’t want to purchase a big list of must-do fixes in order to live in the home they just bought. Yet, some sellers think that it’s a waste to spend money on a home that they’re moving out of soon. That’s quite a predicament. Both sides have valid points except one side-buyers-might be in a stronger position. The seller wants out and if the home is a mess, many buyers will simply move on to the next best house.

Yet, if a buyer wants it badly enough, he/she might agree to purchase your home but it’s guaranteed you’ll take a financial hit as the buyer will want to discount the price for the problems that need fixing. In the end, you might have to fix the issues before the sale anyway. So, starting with a house that is in relatively good order is the best way to begin. Read some of my other columns to see which renovations give a good return.

Tip 3: If you need to sell your home, don’t pull it off the market because you think the season isn’t right. Buyers who need to buy a home will keep hunting through all the seasons. There may be some slow times but if people need a house, they’ll keep looking even in the unlikely times.

Tip 4: Consider incentives. Yes, you can make your home more appealing by tossing in some incentives. It’s best to speak with your REALTOR® about which incentives are best for you to offer. Even practical incentives can help get buyers to your home to view it. These incentives can help encourage the buyer to move forward, especially if other challenges arise.

Tip 5: Stage your home. This is not the same thing as fixing up your home. Fixing up your home includes daily maintenance and repairs. Staging your home involves using experts to make your home showroom-ready–like a model home. I know you might say that all your friends tell you that you have fantastic taste but, trust me, if you’re serious about selling your home, then it’s worth at least having a consultation with an expert in the industry.

Here’s why: They are trained to stay on top of the trends that have mass appeal. They also offer a fresh set of eyes on your home. They might easily point out something that you never saw before because you’ve been living in your home for a long time. They will look at your home from an “outsider’s” perspective and that’s exactly what you need.

Taking the time to, at least consult with experts, allows you to gain knowledge and information about your home and the market place. What you do with that is up to you, but it may just be the difference between a For Sale sign and a Sold sign hanging outside your home.

Moving To A 55 and Older Community: Is It Right For You?

Moving To A 55 and Older Community: Is It Right For You?

Moving To A 55 and Older Community: Is It Right For You?mortgages.com

For a lot of people a 55 and older community can mean spending your retirement living with people your own age, being active, and exploring new hobbies right in your own neighborhood. It sounds a little like the social life of college without the studying. And who wouldn’t want that? What should you know before you buy?

Social club

One of the benefits of a 55 and older community is the social aspect. Not only is it easy to meet people your age, but most communities also have planned events ranging from golf to art. We always talk about why location matters in real estate. And this is no different. Think about what you want to spend your days doing? If you love skiing, Florida probably isn’t the best location for you.

Security

Most 55 and older communities are gated and have private security. Find out exactly what kind of security your community will offer. If this is going to be your second home, the extra security can bring big peace of mind when you’re away.

No one under 55 allowed

This one is a given. If you’re thinking about a 55 and older community, you probably consider this a pro. But it can quickly turn into a con. You might not realize how much you enjoyed the sound of kids playing in the street until you don’t hear it anymore. And if there’s a family emergency, it might mean that your adult kids or grandkids couldn’t live with you. There might also be restrictions on how long younger visitors can stay. And that might mean the end of Camp Grandma during the summer.

The old neighborhood

Don’t underestimate the connection you feel with your old neighborhood, especially if it’s where you raised your family. If that’s the case, it might be worth it to keep both homes for now and work your first home into your estate planning. That way it can stay in the family.

HOA

All those activities and amenities come a at a price, homeowners association fees. Like any home with a homeowners association, there might be strict rules about things like what color you paint your home, how many (and what type of) pets you can have, and what you can plant in your yard. That might be a fair tradeoff for you, but if you’re used to making home improvements on a whim, you might want to think twice.

Taking A Tax Loss On Your Principal Residence

Taking A Tax Loss On Your Principal Residence

Taking A Tax Loss On Your Principal Residence

Question. When my wife died several years ago, I sold the large house we were living in and bought a smaller house.. That purchase was at the top of the local real estate market. I have just purchased a retirement home and would like to sell my current property. However, after real estate commissions and sales expenses, I am facing a sizable loss — and my accountant tells me this loss is not tax deductible. Can you suggest any solutions so that I do not lose my long-term investment?

Answer. Your accountant is correct. Current tax law permits a tax loss deduction for investment property but not for a principal residence. Although it appears that some day in the foreseeable future Congress will provide similar tax relief for the American Homeowner, at present no such laws are on the books. In fact, the current Congress appears intent on reducing homeowner rights and benefits.

You do, however, have a few options.

First, to the extent you can make projections, try to analyze the future marketability of your house. Will the house come back up in value, or will it continue to deteriorate? If you keep the house for a longer period of time, will you have to make a number of costly repairs and thus be throwing good money after bad? In other words, does it make sense to “take your loss and run?”

Second, if you decide it makes sense not to sell now, rent the house out for a year or two. Abandon the house as your principal residence; pay taxes where your retirement home is located, get a new driver’s license and new voter registration card at a different address. Let your friends and relatives know that you no longer call that property your “home.”

A year or two from now, depending on your financial and personal needs, you can then sell the property. Since it will then be investment real estate, you may be able to deduct some of your tax loss on your income tax return (although you should confirm the amount with your accountant).

If you do not need the money — or the tax loss — and if the rental income from the house is worthwhile, you can continue to rent out the house.

Third, once you have converted the property to that of an investment (rather than your principal residence), you might want to consider swapping the house under the “like-kind” (Starker) exchange. Such an exchange would permit you to obtain alternative real estate, without currently having to pay tax on any profit. Obviously, however, if you have no gain, there is no need to consider a Starker exchange. The rules for such an exchange are complex, and have been discussed in earlier columns.

Finally, if you have children, why not consider keeping the real estate until your death. Under current tax law, (which may change in the current Congress) your children will inherit the property at what is known as the “stepped-up” basis. Oversimplified, this means that the children’s tax basis is the value of the property at the date of your death — and not your tax basis. Your tax advisors should be asked to analyze all of these various options.

Your question also raised a very important issue facing many older homeowners– and one that is often overlooked or forgotten. Many homeowners purchased their first home many years ago at low prices. Over the years — especially in the l970s and l980s — real estate appreciated rapidly. Many homeowners moved from one house to another, and took advantage of the roll-over. Now, when they want to sell their last house — or purchase down in price as you are considering — the tax issues become very important.

Let us look at the following example. Assume that in 1970, you and your wife purchased your first house for $30,000. Over the years, you added $20,000 in improvements, and thus the basis for tax purposes (purchase price plus improvements) for you and your wife was $25,000 each. In 1987, you sold the house for $200,000, thus generating what you probably believed was a paper profit of $150,000.

However, since your wife died before you sold the first house, your basis is increased by virtue of the “stepped up” basis. At the time of your wife’s death, the property was worth $200,000. Under the tax laws, you inherited your wife’s basis as of the date of her death; in our example, her basis was $100,000. Thus, for tax purposes, the basis of your first house when you sold it was $125,000 ($25,000 plus $100,000).

Your house was sold for $200,000, and thus your profit was $75,000. But since you purchased your current house within two years from the time the first house was sold, you qualified for the roll-over, and this profit was used to reduce the basis of the Alexandria house. Accordingly, although you paid $300,000 for the new property, in reality its basis is $225,000.

If you sell the house now for $220,000, even after paying real estate commissions and other expenses, your paper loss will not be as great as you think.

However, this is tax talk; you are looking at an actual loss of $80,000, since you purchased the house at $300,000 and now can only sell it for $220,000. There are a lot of people who purchased real estate at the peak of the market, — and despite significant increases in value — many homeowners are still unfortunately under water.

And the rollover has long been replaced by the up-to-$250,000/$500,000 exclusion of gain.

 

 

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