Senior-citizen home sellers benefit from sizeable tax exemption

Answers to capital gains dilemma bring wide smiles
By: Robert J. Bruss: Inman News
DEAR BOB: My wife and I sold our home in 1993. We bought it for $93,500 and sold it for $200,000 and did not pay any capital gains tax by using the $125,000 "over 55 rule" exemption. We bought our current retirement home the same year for $131,500. Now we want to sell our retirement home for its market value of about $325,000. Can we use the $250,000 tax exemption so we don't have to pay any capital gains tax although we previously used the $125,000 exemption? – Glenn B.

DEAR GLENN: Yes. When you sold your home in 1993 for $200,000, you had a capital gain of $108,500 ($200,000 minus $91,500).

Under the now repealed, pre-1997 Internal Revenue Code 121, called the "over 55 rule," you were entitled to claim up to $125,000 tax-free profits. Presuming you were over 55 and qualified for that tax break, you owed no tax on the sale of your previous home.

Then you purchased a less expensive principal residence costing $131,500, which you now plan to sell for $325,000. That's a very handsome net profit of about $193,500 on which you want to avoid paying capital gain tax.

The current Internal Revenue Code 121, enacted in 1997, allows use of the $250,000 principal-residence-sale tax exemption (up to $500,000 for a qualified married couple filing jointly) on your capital gain from the current home sale. Your ages don't matter.

To qualify, you must have owned and occupied your principal residence at least 24 of the 60 months before its sale. You appear to qualify. Your prior use of the old IRC 121 does not prohibit you from using today's far more generous current IRC 121 $250,000-per-person tax break. For full details, please consult your personal tax adviser.

IS A GENERAL POWER OF ATTORNEY AS GOOD AS A LIVING TRUST?

DEAR BOB: You recently said when a house title is held in a living trust, if one co-owner becomes incapacitated, the other trustee can make decisions concerning the house. If there were no living trust, wouldn't a general power of attorney for financial affairs accomplish the same result? – Jerome G.

DEAR JEROME: My experiences with powers of attorney in real estate transactions have been the title insurance companies insist on verifying the principal is still alive and understands the transaction.

For example, I vividly recall a transaction where the title insurance officer made a long-distance phone call to Sri Lanka to talk with the power-of-attorney grantor. She verified his identity and that he understood the transaction documents his attorney-in-fact sitting across the desk was signing on his behalf.

If title insurance cannot be obtained, most buyers and lenders refuse to proceed. A living trust is usually much better than a power of attorney. For full details, please consult your attorney.

WHAT HAPPENS TO RENTAL PROPERTY DEPRECIATION WHEN OWNER DIES?

DEAR BOB: What happens to my rental property accumulated depreciation after I die and my children inherit my property? – Paul W.

DEAR PAUL: They will inherit your rental property with a new "stepped-up basis" to market value on the date of your death. Uncle Sam will forget all about the depreciation tax deductions you claimed. Isn't he nice? For full details, please consult your tax adviser.

The new Robert Bruss special report, "The Seven Best Ways to Avoid Capital Gains Tax When Selling Your Home or Investment Property," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Questions for this column are welcome at either address.