Don’t Waste Home-Sale Tax Break
Q: My husband died last year at age 57. I am 51. At the time of his death, our home was up for sale, but it did not sell until three months after his passing. Now I am wondering if I may claim the $125,000, one-time exclusion on my 1993 tax return. The return will be a joint one, since my husband was alive for a portion of the year, and he did meet the criteria for using it. I have gotten conflicting advice from accountants. -- H.E.F .
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A: The situation is far more hopeful than you might think. In community property states such as California, assets held as community property are entitled to a full step up in value, to the date of one spouse’s death. (Assets held as the sole and separate property of the deceased would also be entitled to a full step up in value.)
If your home was held as community property, it is now valued as of the date of your husband’s death. This means you probably had little or no taxable gain when you sold the house, since the sale occurred just three months after his death.
Why should you even be considering using the $125,000 exemption when you should have almost no gain to exempt? This is what your accountants should have told you! This means that when you turn 55--and assuming that you do not marry someone who has already used his exemption--you are free to use the full $125,000 deduction upon the sale of another home.
If the property had not been entitled to a full step up in value, exposing you to a sizable taxable gain, our experts say you would not have been eligible to use the $125,000 exemption, because you do not meet the age requirement.
Although your husband did meet all the criteria at the time of his death, the home was not sold until after his passing. His dying before the sale means you must qualify on your own for the exemption in order to use it.
IRS Views a ‘Co-Op’ as Any Other Residence
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Q: I purchased a unit in a cooperative housing project, or “co-op” several years ago, and recently sold it at a considerable loss. The liability for property taxes, insurance and other matters all reside with the co-op. Since the co-op is a corporation, am I entitled to deduct my loss on the sale as a capital loss? -- S.R.Z .
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A: The Internal Revenue Service considers a co-op the same as any other type of personal residence in determining tax obligations upon its sale. And, as you apparently know already, the IRS does not permit taxpayers to deduct any loss from the sale of a personal residence. Nice try at splitting hairs, but the government won’t accept it.
Home Can Be Used in Tax-Deferred Exchange
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Q: I want to convert my single-family house to a rental and then trade the house for other real estate in a tax-deferred exchange. The home is worth $300,000 and has a $100,000 basis. My loan balance is $135,000. May I trade it for apartments or commercial real estate? -- J.M .
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A: You may convert your home to a rental and then treat it as you would any other investment property, including trading it for another piece of investment real estate, such as apartments, offices or even raw land. Our experts warn, however, that you should hold the house while renting it for a “considerable” period of time, to satisfy any potential questions from the IRS. Our experts say you should rent it for at least a full year, preferably longer, before exchanging it.
Any new piece of property you get in exchange for the house must be worth at least the $300,000 market value you place on the house. Further, to qualify for the full tax advantages of the exchange, the mortgage on the new property must at least equal the $135,000 owed on the house.
Taxpayers generally have no more than 180 days to complete such a property exchange from the time the process begins, and you must identify the replacement property, or properties, within 45 days of relinquishing your property. The exact time the process begins is determined by when you actually relinquish your property. This date can be negotiated with all the players in the trade, so include an attorney representing you who is thoroughly familiar with all the rules regulating these complex transactions. A competent professional on your team can assure that you get the property you want and still meet all the IRS deadlines.
IRA Rules Cover Use of Bequeathed Account
Q: My daughter is my IRA beneficiary. When I die, may she take the balance of my IRA account over her life expectancy, or must she take it all in a lump sum at the time of my death? F.G.
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A: If you had already begun taking distributions from your IRA, a non-spouse beneficiary must continue withdrawing from the account at least as fast as you were. If the deceased had not begun withdrawing from the account, a non-spouse beneficiary may either take distributions annually over his or her life expectancy or withdraw the entire sum by the end of the fifth year after the deceased’s death. The deceased’s plan may specify the method to be used. If the plan does not, the beneficiary should specify the preferred method by Dec. 31 of the year after the deceased’s death. At no time may a non-spouse transfer any part of a deceased’s IRA to his or her own account.
The rules are considerably different for a spouse who inherits an IRA. A surviving spouse may transfer the funds into his or her own IRA account and continue deferring taxes on that money until he or she reaches age 70 1/2.
