How Home Replacement Rule Works in Divorce
QUESTION: My husband and I were recently divorced. We plan to sell our home. It is worth about $160,000 and we owe almost $90,000. We bought the house for $119,000 so we have a modest profit. I have purchased a condominium for $96,500 where I now live. But I don’t know if my husband will be buying a house or condo. In a divorce situation like this, is there some way I can avoid paying tax on my half of the profit when our home sells?
ANSWER: Yes. In divorce situations, the famous “rollover residence replacement rule” of Internal Revenue Code 1034 is applied individually to each ex-spouse.
As you probably know, this tax rule requires home sellers to defer their profit tax if they buy a replacement principal residence of equal or greater cost within 24 months before or after the sale of their old principal residence.
Presuming your old home sells for a $160,000 net sales price after paying selling costs, your share is $80,000. The mortgage balance is irrelevant for tax deferral.
To qualify for profit tax deferral, you must buy a replacement principal residence costing at least $80,000. Since you already bought that $96,500 condo, which you occupy, tax on your half of the sale profits qualifies for deferral.
However, if your ex-husband doesn’t buy a qualifying replacement principal residence within 24 months after your old home sells, then he will owe tax on his half of the sale profit. To avoid any possible tax liability for your ex-husband’s profit share, please consult your tax adviser, who will probably recommend filing separate 1995 tax returns.
Loss on Home Sale Is Not Tax-Deductible
Q: We bought our home in 1991 but had to sell it in early 1995 due to a job transfer. After paying the sales commission and other selling costs, we lost about $16,000. Our CPA says we cannot deduct this loss on our income tax returns. But if profits are taxed, why can’t losses be deducted?
A: Nobody said the tax laws are fair. Under current tax law, losses on the sale of your personal residence are not tax deductible. However, there are several tax law proposals in Congress, which will allow deductions for personal residence sale losses. If they become law, perhaps they will be retroactive to January, 1995.
How to Find a Good Real Estate Attorney
Q: You often recommend consulting a real estate attorney. But how can I find a top quality real estate lawyer who knows more about real estate law than I do?
A: To find a good real estate attorney in your community, phone the local Assn. of Realtors. Ask for the name of their attorney. He or she is usually an excellent real estate attorney. But if that person is too busy, ask him or her for a recommendation to another local real estate attorney.
How Much Interest Can Be Deducted on Home?
Q: I own my home free and clear. It is worth about $250,000. When I contacted a mortgage loan officer at my bank about obtaining a mortgage on my home, she said I can only get a tax deduction for interest on a $100,000 mortgage. Is this a new law?
A: Under current tax law, home buyers can deduct interest on a home acquisition mortgage up to $1 million. In addition, home owners can deduct interest on a home equity loan up to $100,000.
Since you already own your home, your mortgage won’t qualify as a home acquisition loan for purchase of a principal residence. That means you can only deduct interest on a home equity loan up to a $100,000.
Buyer Sings Praises of Mortgage Brokers
Q: My wife and I had to file bankruptcy about a year ago due to embezzlement problems at my grocery business. We thought the bankruptcy would mean we could never buy a home. But then we read a letter in your column a few months ago about how a reader with bad credit got a home loan from a mortgage broker. We found a wonderful mortgage broker who had the patience to document our problem and get us pre-approved for a mortgage with a major lender. Last month, we closed the purchase of our first home, barely a year after filing bankruptcy. Please tell your readers that caring mortgage brokers can obtain home loans even for home buyers with bad credit.
A: I couldn’t have said it any better than you did. A major advantage of working with a good mortgage broker is your loan application can be “shopped” among dozens of prospective lenders. I’ll bet your mortgage broker got turned down by several lenders before one said “yes” to your unique loan application.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, Calif. 94128. Bruss suggests consulting an attorney or tax adviser before making important real estate decisions.
