Casualty Loss Must Be ‘Sudden or Unexpected’ to Be Tax-Deductible
QUESTION: The soil underneath our home is gradually sinking. We have learned that our house was built on top of an old garbage dump that was closed in the mid-1950s, filled and converted into a subdivision for about 150 homes.
Some owners have jacked up their homes to make them level, but our house is built on a slab foundation, so leveling it will cost at least $30,000. If we decide to go ahead, can we deduct this major expense as a casualty loss on our income tax returns?
ANSWER: You are asking a very difficult question to which there is no right or wrong answer. To be able to deduct a casualty loss on your income tax return, the loss must be “sudden, unexpected or unusual.”
The IRS could argue your loss is caused by the gradual subsidence of the land underneath your house, so it does not qualify. However, if the land suddenly sank under one portion of your home, then it could qualify for the casualty loss tax deduction.
I suggest that you consult your tax adviser. He or she will also explain that a casualty loss deduction is allowed only to the extent it exceeds 10% of your adjusted gross income. For example, if you and your spouse have a $50,000 adjusted gross income, the first $5,000 of a casualty loss would not be deductible.
You should also be aware the IRS loves to audit casualty losses because taxpayers often cannot prove these deductions. However, if you and your tax adviser conclude your problem does not qualify as a casualty loss, your expense is then a capital improvement, which can be added to your adjusted cost basis for your home.
Should Commission Be Split With Lawyer?
Q: I am a real estate broker. Recently, I met the owner of a large apartment complex who listed his building for sale with my firm. I called a few of my business contacts and located a buyer within about a week. When I brought the full-price offer to the seller, he insisted his attorney review it.
But the attorney says he wants half my sales commission if he is to recommend his client accept the offer. I asked the attorney if he is a licensed realty broker and he replied that attorneys do not have to be licensed as brokers. I said I would think about the situation. As the sales commission is almost $140,000, do you think I should split it with this crooked attorney?
A: No. Attorneys are exempt from real estate license laws but they are not permitted to share in real estate sales commissions without a real estate license. I suggest your correct reply should be: “The real estate license law does not permit me to split my sales commission with an unlicensed person.
“I’m sure you don’t want me to lose my license. If you insist on receiving part of my sales commission, then I must report your illegal demand to your client and to the state Bar Assn.”
Sell Your Home Before You Buy a New One
Q: I know we made a bad mistake but hope you can get us out of our mess. We committed ourselves to buy a new house before selling our old one. Since our purchase offer had a contingency for the sale of our old home, we thought we were safe.
But then another buyer made an offer to purchase the house we want to buy, and the seller insisted we either remove our contingency or give up the house. So we waived the contingency. That was two months ago and we haven’t had any offers for the sale of our current home. What should we do?
A: Your situation is a classic example of why prospective home buyers should sell their old home before buying a new residence.
One solution is to forfeit your earnest money deposit on the new home if there would be no further liability. That might be your cheapest solution.
But another choice is to obtain a “bridge loan” on your old home so you will have the cash to buy your new home. But this can be an expensive choice. The interest rate on bridge loans isn’t low.
Sometimes It’s Better to Rent Than Own
Q: Recently I attended a real estate investment seminar where the speaker, who seemed very knowledgeable, said it is cheaper and smarter to rent your home than to own it. My wife and I pay about $1,200 per month for the mortgage payment and property taxes on our home. But we could rent a similar house down the block for $950 per month. Do you think we should sell our home and rent instead?
A: No, no, no. The seminar speaker you heard is absolutely correct in telling you that it is cheaper and smarter to rent your home than to own it. However, most folks don’t like the idea because they want to own the home where they live.
The solution is to rent the residence in which you live and own an equivalent rental house. For example, you could rent that house down the street for $950 while you rent your present home for $950 to tenants.
Yes, you will have a negative cash flow of about $250, plus maintenance and insurance. However, you will be able to depreciate your former residence, thus resulting in a tax loss. If your adjusted gross income is less than $100,000, you can deduct up to $25,000 of such a loss against your ordinary income, such as job salary, interest and dividends.
I must admit although it makes sense to rent a residence instead of owning it, I don’t do that. There is something about the security of owning your home that can’t be compensated no matter how great the tax benefits. Before you move out of your home and rent one down the street, please consult your tax adviser for full details.
Realtor Defends Need for 6-Month Listing
Q: As a realtor for the past 12 years, I find your column must reading. In fact, we often start out our Monday morning sales meetings by discussing your articles. We don’t always agree, but you certainly provoke a lively discussion among our sales associates. However, one thing we strongly disagree about is the term of the listing.
I realize you hear from the unhappy home sellers who signed six-month listings and their agent did a poor job. I have no apology for those agents. But most realty agents need 90 days to sell a home in a typical market. By the time we get the listing into the local multiple listing service, begin our advertising program, and work with interested buyers, it takes at least 30 days. If the local market is slow, as it is in many cities today, homes don’t sell instantly. Isn’t it about time you rethink your ideas about the listing term?
A: Thank you for sharing what Paul Harvey would call “the rest of the story.” The big drawback of a 90-day listing is most realty agents work hardest, smartest and fastest just before a listing expires. As a real estate salesman for several years, I know how that works.
Over the years, I have received many letters from home sellers who signed long-term listings, only to discover their agent is not doing everything possible to professionally market the home.
For example, perhaps you recall the recent letter from the home sellers who learned that their agent didn’t promptly submit their listing to the multiple listing service for 30 days. That wouldn’t have happened with a 30-day listing.
For this reason, I recommend home sellers sign a 30- or 60-day listing with the understanding that the listing will be renewed if the agent is doing a good job when the listing expires with the home unsold. This strategy prevents the home seller from getting stuck with a lazy agent.
Move Back Into Rental to Avoid Paying Tax
Q: About three years ago we moved to a new town about 75 miles from our former home. Since we weren’t sure about our new jobs, we rented our old residence to tenants. Now we’ve decided to buy a home in our new location. To do so, however, we must sell our old home to get the cash for our down payment. How can we accomplish this and avoid tax on our sale profit which we estimate will be about $75,000?
A: That’s easy. Just move back into your former residence. Then sell it and buy a replacement principal residence of equal or greater cost within 24 months before or after the sale. This is the “roll-over residence replacement rule” of Internal Revenue Code 1034.
The tax code does not require a minimum occupancy time but most CPAs recommend six to 12 months. Please consult your tax adviser for further details.
Life Estate May Protect Property for a Son
Q: We have three wonderful adult sons. I am 74 and my husband is 82. As we both have heart problems, we could die any day. One of our children is mildly retarded and we want to be sure he receives our house when we die.
He lives with us now. But we are worried about one son who might challenge our wills, since my husband has Alzheimer’s disease. In your opinion, what is the best way to make certain our retarded son receives our home? Incidentally, we have provided for all three sons through a trust, so they will have handsome incomes.
A: A life estate could solve your problem. You could deed your home to the retarded son now but reserve a life estate in it for the lives of you and your husband. It would then be very difficult for either of your other sons to take the house away from the retarded son after you both pass away. But please consult your attorney and tax adviser for further details.
No Need to Reinvest All in Replacement
Q: Two months ago, we sold our home. But after paying off our mortgage and pressing personal bills we have only about $33,000 left with which to buy another house. Our real estate man says we must reinvest all the cash from our home sale into a replacement home if we are to avoid paying tax on our sale profit, which was about $58,000. How can we get out of this mess?
A: What mess? To defer the tax on your home sale you do not have to reinvest all your cash received into the purchase of a replacement home. Your real estate agent is mistaken.
All that matters if you are to avoid paying tax on your sale profit is that you buy and occupy a replacement principal residence of equal or greater cost within 24 months before or after the sale of your old home. Internal Revenue Code 1034, known as the “roll-over residence replacement rule,” says nothing about reinvesting all the cash received from your home sale into the purchase of a replacement home.
An extreme qualifying example would occur if you sold your old home for all cash and bought a replacement principal residence of equal or greater cost for nothing down, such as with a no down payment VA mortgage. Then you could pocket the tax-deferred cash to spend as you wish. Please consult your tax adviser for more details.
Home Sale Tax Losses Are Not Deductable
Q: We bought our home last year, expecting to stay here forever. But then my wife received a tremendous job opportunity in New York City. Since I am a free-lance writer and can live anywhere, we decided to sell our home and move. But our problem is, if we sell our home we will have a loss of about $6,500 on the sale of our home after we pay the realtor’s commission. Is this loss tax deductible?
A: No. Unfortunately, losses on the sale of your personal residence are not tax deductible. But Uncle Sam is very quick to tax home sale profits, unless the sale qualifies for the “over 55 rule” $125,000 tax exemption or the “roll-over residence replacement rule” tax deferral. Please consult your tax adviser for further details.
