'Excess mortgage' spells trouble for longtime homeowner

Property sale may bring heavy taxes
By: Robert J. Bruss: Inman News
DEAR BOB: I recently sold my home and am trying to figure out if I owe any capital gain tax. My purchase price was $57,000 and we added about $125,000 of improvements over the years. The net sales price was $642,000. The mortgage balance was $422,000. I figure my capital gain is $220,000 ($642,000 minus $422,000). But my friend says my capital gain is $642,000 minus my $182,000 basis, for a $460,000 capital gain, of which $250,000 is tax-free. Who is right? – Hamilton R.

DEAR HAMILTON: Your friend is right. You are wrong.

Forget the irrelevant mortgage balance. You have a situation where the $422,000 mortgage (probably from a refinance) exceeds your $182,000 adjusted cost basis ($57,000 plus $125,000 capital improvements). This is called an "excess mortgage."

To calculate your capital gain from your $642,000 net or adjusted sales price, subtract your $182,000 basis to arrive at a $460,000 capital gain.

Presuming you owned and occupied the home as your principal residence at least 24 of the 60 months before its sale, you qualify for the $250,000 home-sale tax exemption of Internal Revenue Code 121. Subtracting the $250,000 exemption from the $460,000 capital gain leaves a $210,000 taxable capital gain.

However, you said, "We added about $125,000 of improvements over the years." If you are married, and your spouse meets the 24 out of last 60 month occupancy test, and if you file a joint income-tax return in the year of home sale, then she can claim an additional $250,000 tax exemption under IRC 121.

Or, if you have a co-owner on the title who also meets the occupancy test, then he or she is entitled to a $250,000 principal residence sale tax exemption, making the sale 100 percent tax-free. For full details, please consult your tax adviser.

REALTY AGENT DISAGREES ABOUT 90-DAY LISTINGS

DEAR BOB: As a realty agent, I agree with about 85 percent of your answers. The big disagreement we have is realty agents need more time than the 90-day listings you recommend to sell most homes. In my local market, the average days on the market for a house is currently 105 days. When sellers point to your articles where you say a 90-day listing is sufficient, I show them why I need more time. Please stop saying 90 days is the ideal listing time – Curt R.

DEAR CURT: If you are an "average" realty agent in your community where the average days on the market for a house is 105 days, you are correct than you probably can't get a listed home sold in 90 days.

But my readers are above average, and I don't recommend they hire just average listing agents.

The biggest reason I recommend 90-day listings for home sellers is then they aren't stuck with a lazy agent for a long time, just in case they chose a "bad agent." I suggest you improve your sales skills so you become an above-average agent who sells listings in less than 90 days.

MUST LISTING AGENT SHARE LISTINGS?

DEAR BOB: I am a fairly new real estate agent. To get started, I represent mostly buyers (rather than sellers). So far, I have sold two houses and one condo in my first three months in the business. But there are several independent brokerages in our area that refuse to share their listings. They don't put them into the local MLS (multiple listing service) although they are members. The reason, they say, is their sellers want the listing firm to have an "office exclusive" for the first 30 days. This makes it tough on buyer's agents like me whose buyers ask me about newspaper ads for houses where the listing agents won't cooperate. Isn't there a law the listing agents must cooperate? – Ted W.

DEAR TED: No. If the seller is aware in the listing contract that the listing agent's firm will have an "office exclusive" for the first 30 days, there is nothing the other local realty agents can do to force such an agent to allow you to show those listings.

However, an exception could occur if the local MLS has a rule that a member brokerage must immediately place all listings into the MLS within 24 hours. But it's easy for a listing agent to get around such a rule.

The new Robert Bruss special report, "24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.