Polling Place and Income Taxes May Help Determine Residence
QUESTION: I am 78 and my wife is 72. We spend about six months a year living in our Florida home and about six months in our other home that we have owned about 27 years. Next year, if the real estate market improves, we plan to sell our old home and live full time in Florida. Our home sale profit should be at least $100,000, perhaps more, depending on economic conditions.
My question involves that “over 55 rule” $125,000 home sale tax exemption you often discuss. If the IRS challenges us, will we have any problem proving the house we sold was our principal residence, since we spend about equal time living in each home?
ANSWER: Yes, you have a tax problem. Internal Revenue Code 121, the “over 55 rule” $125,000 home sale tax exemption, says you qualify if (1) you or your co-owner spouse are at least 55 on the day of sale, (2) you have owned and lived in your principal residence at least three of the five years before the sale, and (3) you have never used this tax break before.
Since you spend only about six months each year living in the residence you plan to sell, if the IRS challenges your $125,000 tax exemption claim, you won’t be able to prove you lived there 36 months out of the previous 60 months, since you only resided in each house 30 months out of the last 60 months. Other factors that help determine which is your principal residence include where you vote, where you file your income-tax returns and where you belong to civic organizations. For full details, consult your tax adviser.
Low Adjustable Rate Turns Out No Bargain
Q: We recently refinanced our home with an adjustable rate mortgage. The 4.95% interest rate was too low to resist. But now we have received a copy of the loan papers and read this bargain rate only applies for the first three months. After that, it adjusts to the Cost of Funds Index, plus 3%. If the Cost of Funds Index remains stable I figure we will be paying about 7.87%, which is the rate we could have gotten on a fixed rate mortgage with no worry. What should I do?
A: The time to read your mortgage papers was before, not after, signing them. You had a three-day Truth-in-Lending rescission period during which you could have canceled that very bad loan transaction. The 4.95% teaser (or sucker) interest rate lured you into a costly mortgage mistake.
A 3% margin above the Cost of Funds Index is very high. I notice you neglected to tell me if your loan has any safeguards for maximum annual interest rate increases and maximum lifetime increases. I hope you believe in the power of prayer, because I suggest you pray that interest rates don’t increase.
sellers. There are at least a half-dozen companies that provide these warranties to home sellers for the benefit of buyers.
The cost for a typical policy is about $300. It is well worth the money because it pays for repairs to the plumbing, wiring, furnace, built-in appliances and water heater within 12 months of the sale. For an extra premium, most firms will include the roof, air conditioning, swimming pool and plumbing outside the perimeter of the house. Your real estate agent can give you full details.
Brother-in-Law Agent Should Give Analysis
Q: In August, we listed our home for sale with my wife’s brother who is a real estate agent. We both knew he would do a lousy job, but we had no choice because of the family. He recommended the listing price. Now he wants us to reduce it by $5,000 and sign another 90-day listing. He says if a house doesn’t sell within two months, the thing to do is reduce the price. But how can we know what our house is really worth?
A: Your agent should have prepared a written comparative market analysis at the time of listing and at the time of proposed price reduction. This form shows recent neighborhood home sale prices, so you can add or subtract value for the pros and cons of your home to arrive at its fair market value.
I strongly recommend you interview at least three successful local agents to get their opinions of your home’s market value. Also get their references of recent home sellers to phone and ask: “Were you in any way unhappy with your agent and would you list your home for sale again with the same agent?” If you can possibly avoid relisting with your brother-in-law, I suggest you list the home with a more successful agent.
