New tax law irks couple in real estate exchange

Holding period nonexistent in 2002
By: Robert J. Bruss: Inman News
DEAR BOB: In May 2002 we entered into an Internal Revenue Code 1031 tax-deferred exchange for the sale of our Kansas City, Mo., rental condo to a rental house in Sarasota, Fla. It was our understanding it should be rented at least six months and then we had to occupy it as our principal residence for at least two years before selling it. We rented the house for seven months and have occupied the house since January 2003. Now, I read in one of your recent articles that the length of ownership was changed as of Oct. 24, 2004, for such property acquired in an exchange to five years before we qualify for the $500,000 principal residence tax-free exemption. However, when we initiated the tax-deferred exchange, there was no five-year holding period for our situation. Does this new tax law apply to our situation? – Roberta K.

DEAR ROBERTA: Yes. So many taxpayers figured out this major tax loophole, which prompted Congress to change the tax law.

Now, if you acquired a rental property in an IRC 1031 tax-deferred exchange, as you did, the acquired property must be owned at least five years and occupied as your principal residence at least 24 months during that time before you can claim the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return).

Sorry, Uncle Sam can change the tax law retroactively. For full details, please consult your tax adviser.

NO WAY TO HURRY PROBATE COURT PROCEEDINGS

DEAR BOB: Four years ago, my mother died without a will so her estate had to go through the local probate court, which is hopelessly corrupt. The semi-retired, senile judge only works two days a week. There are four siblings entitled to our mother's estate. But two of those siblings died before her. Their five children are entitled to their late parents' share. Also, the state is claiming Medicaid reimbursements for her care the last years of her life in a horrible convalescent home. Meanwhile, the only thing of value in mother's estate (her house) is rapidly declining in market value due to lack of maintenance. My nephew lives in it with his buddies, gradually wrecking it. They refuse to pay expenses. I have paid the property taxes and mortgage payments to prevent loss by foreclosure. What can I do to speed this estate settlement and get reimbursed? – Larry R.

DEAR LARRY: Your situation is an extreme example of what can go wrong when a property owner dies (1) without a living trust or a will, and (2) local probate court costs and delays complicate the state law of intestate succession to the statutory heirs.

I presume the heirs are represented by a competent local probate attorney. The best thing you can suggest is all the heirs enter into a written division of your late mother's assets and present that agreement to the probate judge for approval. I can't imagine why it is taking four years to settle an estate, unless there are complications.

GET A SECOND OPINION IF YOU DON'T LIKE THE FIRST

DEAR BOB: I live in Florida. My lawyer advises me not to put my home into my living will. What is your opinion of this? – John W.

DEAR JOHN: I hope you meant to say "revocable living trust" rather than "living will." A so-called living will is a written agreement specifying your desire as to medical care when you are unable to communicate.

For example, if the late Terri Schiavo had a living will expressing her desire to be mechanically kept alive, or not, all that recent unfortunate and expensive legal action would have been unnecessary.

A living will is obviously inappropriate for holding title to your home.

In Florida, some attorneys advise their clients not to place title to homes in living trusts. But other attorneys say there is no problem if it is clearly a revocable living trust. I suggest you obtain a second opinion from a Florida attorney experienced with living trusts.

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.