Homing in on How IRS Treats a Sale
Q: I have a new job that requires me to move. Due to the depressed real estate market, I have leased my home and given the tenant an option to buy it at the end of the two-year lease. I am currently renting an apartment.
Does this lease change the character of my home from a primary residence to a piece of income property?
Am I forfeiting my right to defer my gain on the home when I finally do sell it?
And what about the 24-month replacement period--when does that begin? --D.W.Z .
A: So long as you have not purchased a new house and are actively trying to sell your old home, you should not face any problems. The fact that you have leased the home should not change its character as your principal residence or undermine your ability to roll over your sale profit to a new home.
Although you are no longer living in your home, our experts believe you can effectively argue that your lease-purchase option deal amply demonstrates your intent to sell the home and your ongoing pursuit of that goal.
However, it would be easier, our experts note, if the lease were shorter or if it had been written to give your tenant a guaranteed first right of refusal if you found another buyer during the lease, rather than a simple option to purchase at the end of the lease.
The 24 months you have to reinvest your earnings from the sale of the home into a new home begins on the earlier of either the day you sell your home or the day you purchase a replacement residence.
The key to retaining your home’s designation as your principal residence is your ongoing effort to sell it.
The Internal Revenue Service recognizes that homeowners often face difficulty selling a home immediately upon a job transfer and thus makes allowances for a temporary rental of the home while you are marketing the property. The key word is temporary.
The longer you lease the home and the fewer efforts you expend trying to secure a buyer, the harder it will become to make your case before the IRS.
Figuring the Tax Basis on a Home’s Resale
Q: I sold my residence in 1989 for $515,000. My original cost basis was $85,800, and my selling expenses were $30,200. My gross profit was $399,000. I used my onetime $125,000 exclusion and had a taxable gain of $274,000. My gross profit was 53.2% of the sales price. I took back the note and the buyer paid a down payment and subsequent payments totaling $98,330 before I repossessed the property in 1992. I resold the property earlier this year for $300,000.
Now the hard part. What is my tax basis on the resale? I have asked three different accountants and have gotten three different answers. Also, may I take the $125,000 deduction on the resale?-- E.J.H .
A: According to our experts, your tax basis on the resale depends on when that deal was completed. If the transaction was completed within 12 months of the repossession, your tax basis on the property is $194,982; if the sale took place later than 12 months following the sale, it is $241,000.
Here is how Palm Springs accountant Howard Gordon arrived at these figures. Gordon added your original cost, $85,800, to your selling expenses of $30,200, then added in your $125,000 exemption to arrive at the $241,000.
Now, remember that you have gotten $98,300 in payments on the home, on which you have a gross profit of 53.2%. This calculates to $52,312 on which you should already have paid taxes, leaving you an untaxed balance of $46,018.
If you did not resell the home within 12 months of the repossession, you would report this untaxed amount as income and pay the appropriate tax on it.
But if the sale occurs within those 12 months, you must deduct that amount from your $241,000 tax basis, giving you a new basis of $194,982.
You may not take the $125,000 on the resale since you have already taken it on the original sale; each taxpayer or married couple is entitled to just one exemption.
Again, How to Find Unlisted Companies
Q: I have some stocks that I cannot find listed anywhere. In the past you have mentioned the name of a company that will research what has happened to these companies. Could you possibly run the name of the company again? --S.D .
A: Because this piece of information is one of the most requested of this column, it will be reprinted here--again. Prudential American Securities charges $40 per company to search what has become of the firm in whose name you hold stock. Simply send a copy of the stock certificate along with a check for the correct amount to Prudential American Securities, 921 E. Green St., Pasadena, Calif. 91106.
However, before opening your checkbook, you might consider doing a little sleuthing for yourself. First check the Stock Guide published by Standard & Poor’s; although your company may not be listed in your local newspaper stock listings, it may still be quoted on one of the nation’s stock exchanges. You should also check the “Pink Sheets” published by the National Quotation Bureau in Cedar Grove, H.J. Finally, you should go review the “obsolete securities” section of the Financial Stock Guide Service published by Financial Information Inc.
All three of these publications are usually found at most full-service brokerages, although you should be warned that these offices may not make them available to anyone but their regular customers.
