Closing Costs Should Be Subtracted to Determine Adjusted Sale Price
QUESTION: We recently sold our home. In addition to the realtor’s sales commission of 6% of the sales price, we had to pay a transfer tax, prorated property taxes, title insurance fee, attorney fee and several little fees for recording and documentation.
In a recent article you said closing costs average about 2% of the sales price. But ours were much higher. When we calculate our net sales price, can we subtract all these costs from our gross sales price?
ANSWER: Home sellers’ closing costs, excluding the sales commission, usually average about 2% of the gross sales price. But I hasten to add that closing costs are negotiable with the buyer and often can be shifted to the buyer if the seller needs more cash from the sale.
In some states the transfer costs are very high. But in most states they will be about 2%. Of course, these expenses vary widely depending on what charges the seller has agreed to pay.
Except for the prorated property taxes, which qualify as an itemized personal income-tax deduction, the closing costs you listed and paid should be subtracted from your home’s gross sales price to arrive at the net or adjusted sales price.
From this amount you subtract your adjusted cost basis, usually the purchase price, plus capital improvements added during home ownership, to arrive at your sale profit.
If, within 24 months before or after the sale, you buy a replacement principal residence of equal or greater cost than your adjusted sales price, then you can defer tax on your sale profit. Ask your tax adviser to explain further.
Can Tax Depreciation Wait Till Next Year?
Q: On my 1989 income tax returns I showed a loss of about $38,000 for a commercial building I own. Most of this was a paper loss for the depreciation deduction. Since I could only deduct the maximum $25,000 annual passive loss and have to waste the $13,000 balance, on my 1990 income tax returns can I reduce my depreciation deduction to save it for future tax years?
A: Sorry, but Uncle Sam does not allow you to adjust your depreciation deduction each year according to whether or not you can benefit from it on your income tax return. Once you begin depreciating your commercial property over 31.5 years on a straight-line basis, you are locked into that depreciation rate.
However, you can save up any unused tax losses above your $25,000 annual limit and use those losses to offset profits when you eventually sell your property. Please consult your tax adviser for further details.
A 10-Year Balloon Payment Is Safe
Q: We are considering buying a home where we can assume the existing first mortgage and the seller will carry back a large second mortgage. However, she insists the second mortgage have a balloon payment due in 10 years. Do you think this is dangerous?
A: No. A 10-year balloon payment is perfectly safe. By then you will probably either have enough equity in the house to refinance the first mortgage or perhaps you will have sold the home by then. Incidentally, if you think you might sell the home within 10 years it would be a good idea to make that second mortgage assumable, thereby increasing the salability of the home.
For the second mortgage to be assumable, make sure it doesn’t contain a due-on-sale clause. For further details, please consult your attorney.
Title Lawsuit Clears Up Who Owns the House
Q: We are in the process of trying to buy a house. If it wasn’t such a bargain, we wouldn’t put up with the impossible seller and the equally difficult real estate agent. The trouble is the seller, a widow, doesn’t seem to have clear title.
Years ago, she apparently deeded a partial interest in the house to a man who loaned her some money. Instead of taking a mortgage, he got a 25% interest in the house. She claims he was paid back many years ago. But his name is still on the title and he can’t be located. Any ideas?
A: I am surprised the title insurance company has not suggested the widow, through a real estate attorney, bring a quiet title lawsuit. Such an action will determine if the absent co-owner has any ownership interest in the property. In the meantime, perhaps you can work out a rental arrangement with the seller so you can occupy the house with the rent applying toward the purchase price.
A Run-Down House Sells Far Below Market
Q: I have been an absentee landlord for the last 9 years. A neighbor was supposed to be looking after my house for me and selecting good tenants, but she didn’t do a good job and the last tenants trashed the place. Since I live about 400 miles away, I have decided to sell. Do you think I should fix up the house, at a cost of about $5,000, or sell it in its present badly run-down condition?
A: Fix it up. A run-down house appeals to few prospective home buyers, mostly bargain-hunters like me who expect a purchase price far below the market value of a house in good condition.
Negotiate Deed Terms in Lieu of Foreclosure
Q: Due to illness and unemployment we are unable to make the payments on our condo. The mortgage balance is about what the condo is worth. We have tried to sell it, but the complex is badly built so nobody will buy. Our lender has offered to take a deed in lieu of foreclosure. Is there anything we should be wary about?
A: Yes. Before you give the lender a deed in lieu of foreclosure be sure the lender gives you a written release of liability and a promise not to report the problem to the credit bureaus. Since you have paid the mortgage in full by deeding the property to the lender, you are entitled to such consideration. By signing the deed to the lender you are saving the lender thousands of dollars in costs. In return, the lender owes you some favors, too.
Profit on Second-Home Sale Fully Taxable
Q: Last summer we sold our vacation home for a net profit of about $62,000. Since we plan to buy a winter ski condo in a few months, can we avoid the profit tax if we invest at least $62,000 in the condo?
A: No. Your profit on the sale of your second home is fully taxable. There is no way to avoid the tax, as there is on the sale of your principal residence by purchasing a replacement primary home of equal or greater cost within 24 months before or after the sale (Internal Revenue Code 1034). Please consult your tax adviser for further details.
Rather Than Making a Gift, Let Them Inherit
Q: I am 78 and undecided what to do with my house when I move to a retirement home after Christmas. My late husband and I bought our home many years ago for only $10,000. Today it is worth over $200,000. My son and his family would like to move in when I move out.
If I sell it to them I could use that “over 55 rule” $125,000 tax exemption you often discuss. But I really don’t need the money and am thinking of giving the house to my son and his wife. However, I wonder if they might get a divorce, because they have only been married a few years and sometimes they don’t get along too well. Do you think a gift of the house to them is a good idea?
A: No. When real estate is given away, the donee takes over the donor’s basis. Although I realize your $10,000 initial basis has probably increased due to capital improvements and a stepped-up basis increase when your husband died, your son and daughter-in-law will have a below-market basis if you give them the house now. This will raise their tax liability when they eventually sell the house.
A better alternative is to let them inherit the house when you die. Then they will receive a new basis stepped up to market value on the date of your death. In the meantime, you can let them live in the house in return for paying the expenses. This choice also solves another possible problem in case they should get divorced before you die. For further details, please consult your tax adviser or attorney.
Tenant Improvements Revert to Landlord
Q: About 3 years ago when a tenant moved into a rental house I own, he wanted me to upgrade the wall-to-wall carpets I was planning to install. He agreed to pay $700 toward the cost of the carpets. Now his lease expired and he will be moving out next month. He says the carpets belong to him and he is entitled to remove them since he paid part of their cost. Is this true?
A: No. The general rule is tenant improvements permanently attached to the structure become fixtures that belong to the landlord. In the absence of any agreement that the carpets belong to the tenant, they became your property when they were attached to the building. For further details please consult your attorney.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128.
