When the Clock Starts Ticking on Home Sale
Q: I bought some vacant land in early 1991 with the hope of building my retirement home on it. However, now that the housing market is so weak, I cannot sell my house, build the new home and move into it by early 1993. I believe I must move into my new home within 24 months of selling the old one if I want to roll over the gain from my current residence. Isn’t that true? Should I sell the land and then repurchase it to restart the 24-month period? --W. H. L.
A: Relax, you have more time than you think. The law provides that you purchase your replacement property within 24 months--either before or after--of selling your current residence. Then, you have an additional 24 months after selling your current home to move into your replacement house. This can give you up to four years from the time you purchased your land to move into any home you build on it. Under this timeline, you would have until early 1995 to move into your newly constructed home on the land you bought in 1991.
Walking Fine Line of the Law on Home Sale
Q: Many years ago I purchased a second home that I had hoped to use as my retirement home. However, now I realize that if I move into this home, I cannot roll over my gain from the sale of my present residence since the second home won’t qualify as a true replacement because it was not purchased within 24 months of the sale of my current home. Can I sell my retirement home to a friend, and then repurchase it to qualify for the rollover? -- A. M. V.
A: You question poses interesting logistic as well as legal issues. Our goal will be to advise you completely, while not seeming to induce you to commit what the Internal Revenue Service might consider a fraud. Your goal should be to walk the fine line of the law while achieving the desired results.
According to our tax advisers, the IRS would balk at any arranged sale-buyback deal that would smell like what they call a “step transaction.”
What’s a step transaction? Well, it’s a deal that, in your case, would obligate your friend to buy your home and then sell it back to you for an agreed-upon price. You, in turn, would be obligated to repurchase the house. Of course, this appears to be exactly what you are talking about.
Your deal would work only if it involves no obligations. You would sell your home to your friend, but could have no guarantee that she would resell it to you. Further, our tax advisers say the IRS would look suspiciously upon a sale/resale transaction that took place within a short period of time.
Saying all this, we should make it perfectly clear that we are not suggesting any particular course of action for you to follow. If you had spent as much time planning for your retirement home as you have obviously spent thinking of ways to get around the IRS rules, you might not be in your predicament.
How States Handle IRA Account Taxes
Q: In a recent column you discussed how and why states tax pensions of their former residents. What about bank accounts of former residents, more specifically individual retirement accounts? Are they subject to taxation by the state in which they were established? -- T. F .
A: In general, states do not tax the interest accumulated in savings accounts maintained within their boundaries by non-residents. However, this general rule does not apply to all individual retirement accounts.
If you took a state tax deduction for your IRA, then the state will expect you to pay state taxes on any withdrawals you make from the account regardless of where you are living when you tap into the account. Of course, you would receive a tax credit from your current state of residence for any state taxes you pay to your former state. The intent is not to tax you twice, only to apportion any owed taxes to the correct state.
If you did not take a state income tax deduction at the time you made the IRA contributions, then you would pay state taxes to the state in which you now reside when you make your withdrawals.
Simple rollovers of IRA accounts are not taxed regardless of where the taxpayer is living. The taxes are assessed only when a withdrawal is made.
Claiming Exemption on Spouse’s Death
Q: My husband had just turned age 55 when he suddenly died. Now I find that I cannot continue making my house payments on my own and want to move. May I claim half of the $125,000 profit exemption to which he was entitled? -- F. K. S.
A: No, and you may not need to even worry about it. If you and your late husband held the house as community property, then you are entitled to a full step up to its value as of his date of death. This means that if the house was worth $250,000 as of his death, and you sell it for this amount, you would not have a taxable gain, regardless of what the home’s original tax basis had been.
If you held the property as joint tenants, half of the house (his share) is valued as of his date of death, while your half retains its original tax basis. Although you would likely have a tax liability in this case, you cannot invoke the $125,000 exemption to which your husband was entitled. However, if you live in the house until you turn age 55, then you could take the full $125,000 exemption to which you are entitled on your own account.
