Want to Sell? A Nice Little Home-Sale Tax Loophole Will Close in August
Q.I am so confused about the tax laws as they apply to people who sell a home after living in it for less than two years.
I know that couples who live in a home at least two out of the previous five years don’t have to pay taxes on up to $500,000 of home sale profits. I’ve also heard that people who have to move because of a job change, illness or unforeseen circumstances can use a proportionate amount of the exclusion.
But what happens if you just don’t like the house? We moved back into a home a year ago, after renting it out for several years, to take advantage of the new law. But now we’re remembering why we moved out in the first place: It’s too small and the neighbors are unfriendly. We can’t really argue that these are “unforeseen circumstances” because they’ve existed since we bought the lousy place. We’re trying to stick it out another year, but I’m miserable. Is there any hope? We would have about $100,000 in profit if we sold it today.
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A.Put the house on the market now. If you owned it as of Aug. 5, 1997, and sell it before Aug. 6, 1999, you can use a proportionate amount of the exclusion just as if you had experienced a job change, illness or those mysterious unforeseen circumstances. So if you’ve lived in it as your primary residence for one year--half of the two-year “minimum” period--you can take half of the $500,000 exclusion if you’re married filing jointly. (A single person in these circumstances would take half of a $250,000 exclusion.)
This little loophole didn’t get much publicity. Even this newspaper has given conflicting advice, first advising readers about the exception, then saying it didn’t exist, and now (in this column) reassuring you that it does. The loophole was part of the 1997 Taxpayer Relief Act that changed the rules about how home profits are treated. But remember, you must sell by Aug. 6 to use it.
By the way, talk to your real estate agent or a real estate attorney about whether you need to tell prospective buyers about the neighbors. If they’re simply cold or snooty, that’s life in the Big City; heck, some buyers might actually like to be left alone. If you’ve got shotgun-toting McCoys, however, you’ll need to disclose that or risk getting sued.
Less Than $30,000 a Year and Rich
Q. Thank you for your straightforward responses to the recent “we are not rich” letter complaining about paying taxes on a $800,000 windfall and to “rich and clueless” who wrote that in spite of a luxurious lifestyle, he or she was not rich.
As a single mother of two young children and with an annual income of less than $30,000 and no medical coverage, 401(k) plan or sick leave, I will admit to feeling some pangs of envy when I read about “wealthy” people and their “problems.” However, what I mostly feel is incredulity. In spite of the fact that the federal government labels me as “working poor,” I know that I am rich compared with most of the world and even to many who live here in the U.S. My children and I have our own small home, food on the table and clothes on our backs. We have luxuries like a car, two televisions, a VCR, Nintendo, books and the computer on which I am writing this letter.
The authors of the aforementioned letters need a reality check so that they might acknowledge and appreciate their obvious good fortune. Thank you again for putting a touch of our reality into the Business section of The Times.
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A. I received a flood of positive responses to those columns, but none as eloquent as yours. Thank you for writing, and for being a terrific mom to your children. Your attitude is a treasure in itself.
I got a couple critical letters and e-mails as well, including one saying I was unpatriotic because I called Americans spoiled. Some folks wanted to debate the definition of rich, which is exactly what I was hoping for. And one man (an engineer, I’m sure) wanted to know precisely what income levels qualify one as poor, middle class and rich.
Neither I nor the U.S. Census Bureau has an answer to that one; even the poverty level varies by area and the number of people in the household. But here are some statistics to ponder.
As reported here before, the median U.S. household income was about $37,000 in 1997. That means half of all American households had incomes below that amount, and half above. Sixty percent of American households had incomes under $46,000. Eighty percent had incomes under $71,500. Want to know what it took to get into the top 5% of households nationwide in terms of income? $126,000.
The Census Bureau’s breakdowns for Los Angeles and Orange counties are from 1989--too dusty to be of much help. But the IRS tells us the average adjusted gross income on tax returns filed in Los Angeles in 1997 was $39,601, ranking it in the top 13% of counties in the nation. In Orange County, the average adjusted gross was a whopping $47,593, which puts its residents in the top 5%.
When it comes to wealth, the statistics may be even more revealing. As of 1993, the latest Census data available, the median household net worth--assets or property minus debts--was $37,587. Dividing net worth up by population gets a little trickier, but the poorest 20% of Americans had a median net worth of $4,249, while the richest 20% had a median net worth of $118,996. The next-richest 20% had a net worth of $50,000.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
