‘Primary Residence’ Is Key Phrase
Q. A partner and I own a house worth about $200,000 that we originally purchased for about $125,000. If we sell the house now and dissolve the partnership, will I have to repurchase another house within 24 months for at least $100,000? May I purchase my replacement house outside the United States?-- S.O.T.
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A. The portion of the law allowing homeowners to defer taxes on their real estate gains if they buy another home of equal of greater value within 24 months applies only when the home involved is the taxpayer’s primary residence.
If the home is a piece of investment property, you could engage in what is called a Starker or 1031 exchange, a provision that essentially allows taxpayers to defer paying taxes on their real estate gains if they purchase another, similar piece of investment property with their gains within about a year of the initial sale. But even this law would not apply if you and your partner go your separate ways, since it requires that the same real estate owners transfer their gains together in the replacement property.
However, if your partner is also your roommate and the house involved is your primary residence, then you would have no trouble qualifying for a residential gains rollover on your share of the total gain.
And, yes, you may purchase a replacement residence out of the United States within the required 24-month period and still qualify for the tax deferral on your gains.
Level of Income Sets IRA Eligibility
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Q. I was enrolled in my former employer’s retirement plan and did not qualify for a tax-deductible individual retirement account contribution. However, I changed jobs a few months ago and am not eligible for the new employer’s retirement plan for another six months. Does my new employment status make me eligible for a tax-deductible IRA contribution?-- D.E.R .
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A. If taxpayers, making more than the threshold income, are covered by a qualified retirement plan at any time during a tax year, they are not eligible to make a tax-deductible IRA contribution for that year.
The threshold income is about $35,000 per year for single taxpayers and $50,000 for married couples filing joint returns.
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Rolling Over IRA Funds of a Deceased Person
Q. Can an individual retirement account of a deceased person be rolled over into the IRA of a spouse or heir and still keep its tax-deferred status? *
Y.D.H.
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A. Generally speaking, yes; the IRA funds of a deceased can continue receiving favorable tax-deferral even if the funds are in the account of an heir. However, the rules differ depending on who is inheriting the deceased’s IRA and whether the deceased had begun making withdrawals from the account.
According to our experts, a surviving spouse may transfer the inherited funds into his or her account and continue deferring taxes until he or she reaches age 70 1/2. Then, as with all IRA accounts, mandatory withdrawals begin.
A non-spouse heir is covered by different rules.
If the deceased had not yet begun making withdrawals from the account, the beneficiary can make one of two choices: either he or she can wait until December of the fifth year following the deceased’s death to take out the entire amount, and pay the appropriate taxes; or he or she can take annual distributions from the account over his or her entire life expectancy, paying taxes on the funds each year.
If however, the deceased had begun taking distributions from the account, the remaining balance must be distributed in the same fashion as the deceased had been using. At no time may a non-spouse transfer any part of a deceased’s IRA to his or her own account.
Both Divorcees Can Claim Home Exemption
Q. My ex-wife and I co-own a house in which she still resides. I live elsewhere. We are both over age 55. If we were to sell the house, would we each be entitled to claim the $125,000 exemption on the profits we realize from the sale, or would we be required to share a single exemption?-- P.E.G .
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A. Taxpayers must remember that there are three requirements they must meet to take advantage of the $125,000 exemption. Being age 55 is only one of those requirements. The house being sold must also be the taxpayer’s primary residence and he or she must have lived there for three of the last five years.
There is little question that you have satisfied the first two. But have you lived in the house for three of the last five years? If you are only recently divorced, the answer may be yes. And you would be wise to begin trying to sell the house now while you still meet the eligibility criteria.
If you can meet the requirement both you and your ex-wife would be entitled to a $125,000 exemption since you are no longer married. If you have not lived in the house for three of the last five years, then your ex-wife alone would meet the necessary requirements and only she would be entitled to a $125,000 deduction when the house is sold.
However, if you now own a house and later sell it, you would be entitled to your own $125,000 exemption.
