Move Out of State Affects Tax Filing
Q: My wife was transferred to Ohio earlier this year. I continue to work in California but intend to join her as soon as I can find a job there. We have purchased a new home in Ohio and intend to settle there permanently. How does this arrangement affect our joint income tax filings for 1993? In which state do we file? --A.H.S.
A: Your federal tax return should not be affected by your living arrangement. You may file a joint return from either Ohio or California. Although it doesn’t matter to Uncle Sam, you may want to make the filing from Ohio since that is where you intend to make your permanent residence.
Your state filings will be more complicated. You must file a California return reflecting your earnings while a resident here. Your wife must file returns in Ohio and California reflecting her partial-year earnings in each state. These partial-year filings should cover only the period she lived and was a wage earner in each state. She is not being subjected to double taxation.
Special Condition of Profit Exemption
Q: My father must move into a nursing home. But what about his ability to use the $125,000 profit exemption? Does he stand to lose it because he is no longer living in his home? What if we rent out his home until we can get a buyer in today’s lousy real estate market? Will this affect his ability to use the exemption? --M.L.H.
A: Under federal laws governing use of the $125,000 profit exemption, an elderly homeowner in a convalescent hospital is not considered to have “moved out” of his home as long as he occupies it at least one year during the five years preceding the sale. Therefore, even if your father is in a nursing home for as many as four years, he will be able to satisfy the residence requirement.
Renting the home, however, might upset your ability to claim the exemption. Clearly, the law, which requires a homeowner to live in the residence three of the five years preceding the sale, appears to permit a two-year rental period. Anything beyond that, even for a senior citizen in a nursing home, could be pushing the envelope. You should consult your tax expert.
Rules on Rebates and Taxes Are Clear
Q: I recently canceled a deal to buy a new $33,000 car because the dealer wanted to charge me the luxury tax and the sales tax on the full amount even though he was offering a $3,000 rebate on the purchase. Was I about to be taken for a ride, or was the dealer doing the right thing? --R.C.
A: According to our experts, sales tax should be added to the price of a car before the rebate is subtracted. Any luxury tax should be computed after the rebate is figured in. Based on your example, the dealer was correct in trying to assess the sales tax on the $33,000 price. He was in error when he tried to levy the luxury tax, since that tax now applies to purchases of automobiles for more than $32,000 and your net purchase, for the purposes of this tax, would have been just $30,000.
Fees, Points on Loan Must Be Amortized
Q: I refinanced my home this year and paid the points and other costs when the loan closed. I did not include these charges in the amount I refinanced. Since I handled the costs this way, may I deduct them from my taxes this year rather than amortizing them over the life of the loan? --R.D.M.
A: No. Any deductible refinancing fees and points must be amortized over the life of the new loan--regardless of whether you paid these fees at the time of refinancing or added them into your loan balance. For this reason, many taxpayers prefer to add the fees and points to their loan balances.
Separate Issues Involved in Sale, Construction
Q: We purchased our home years ago for $56,000 and hope to sell it soon for $350,000. We also own some property with two rentals on it that we bought six years ago for $262,000. Our plan is to demolish the rentals and build a new home--plus a new rental--on that property. I figure my construction costs will be about $185,000. May I take advantage of $125,000 profit exclusion on the sale of our home? How can I best shelter my profit on that sale? --L.A.F.
A: You are looking at two separate issues. First, you want to shelter the gain from the sale of your home by purchasing a replacement residence within 24 months of the sale. You also want to use your one-time $125,000 home sale profit exemption. Do not confuse these.
Now, let’s look at your situation. If you are at least age 55 and have owned and occupied your home for three of the last five years, you are entitled to invoke the $125,000 profit exclusion. If you sell your home for a net sales price of $350,000 and use the exclusion, you would be required to purchase a replacement home for at least $225,000 to avoid taxation on your gain ($350,000 minus $125,000.)
Your plans for a replacement residence expose you to potential taxes on your home sale gain. For starters, because the land on which you will build was purchased six years ago, its cost will not count toward the replacement residence. To be included in the replacement residence cost, it must have been purchased within 24 months--either before or after--of your home sale. Your construction cost projections of $185,000 are $40,000 less than the amount you are required to reinvest.
If any of these costs are attributable to the rental you want to build, they will not count toward your replacement home cost.
Unless you spend $225,000 to build your new home--and only your residence--you will face a tax bill on your home sale profit.
