Does soldier qualify for $250K tax break?

Sudden overseas deployment leaves 2-year occupancy rule unsatisfied

By Ilyce R. Glink
Inman News

Q: I have a friend who is in a bind. He is an active-duty Marine. Less than two years ago he was transferred to Camp Lejeune (North Carolina) and bought a home. He just received orders to report to Okinawa, Japan, by the end of the month. His home is for sale and will sell soon.

The problem is that his property has appreciated somewhat and he will make a profit after his expenses are factored in. According to the IRS, you have to live in your house for two of the last five years in order to keep up to $250,000 in profits tax free.

Is there a special clause or waiver for someone in his situation where he can sell his home now and still receive his capital gains up to $250,000 per person tax free? Or is there any chance with his particular case that waiting until the two-year mark before escrow closes that he may receive this capital gain tax free?

Also, if he is allowed to receive his gains tax free, is there a time limit established on how long he has to spend this capital gain?

A: The IRS allows homeowners to avoid having to pay any taxes on the gain from the sale of their home up to $250,000 for a single homeowner or $500,000 for married couples. However, the homeowner must have lived in the home as his or her principal residence for two years out of the last five years. If your friend has a gain from the sale of his home and it is less than $250,000, he would want to avoid having to pay federal income taxes on this profit.

But the IRS has some exceptions for people like your friend who have to move because of certain unforeseen circumstances, including death, divorce, taking a new job that is at least 50 miles from your previous job, health problems, and having twins or triplets. Other unforeseen circumstances include natural disasters and terrorist attacks, according to the IRS.

Your friend's job change to Japan seems to qualify as an "unforeseen circumstance" and he should be entitled to get part of the exclusion. The IRS publication has a table your friend can use to determine the percentage of the $250,000 exclusion that he will be entitled to.

Here's how to calculate his exclusion: If he lived in the property for 18 months, or 75 percent of the time needed to keep up to $250,000 in profits tax free, then he would be able to keep up to 75 percent of the $250,000 exclusion, or up to $187,500.

The formula would change if he had bought the home more than two years ago, rented it for some time and then lived in it for some of the time. But unless there is something extraordinary about the situation, the IRS will allow some of the exclusion to be used by your friend.

As an additional consideration, as a member of the armed forces, if he decided not to sell the home, he could disregard that time that he moved out of the home and rented it while he was serving in Japan. When he is reassigned back in the states, the five-year time period would be back in force.

There are certain rules he must follow, but the IRS effectively tells a member of the armed forces (Uniformed Services, as the IRS refers to it) that he or she will be given a pass on the five-year rule under certain circumstances.

The IRS offers a free booklet that explains the process of determining who qualifies for the exclusion and the various rules that must be complied with to avoid having to pay taxes on the gains from the sale of a home. Go to the IRS's Web site, www.irs.gov, and look at Publication 523, "Selling Your Home."


www.Lagretrealestate.com

Can we claim $500K tax break if renting to tenants?

Couple learns tax implications of selling primary home, rental

By Robert J. Bruss
Inman News

DEAR BOB: We have rented out a legal apartment in our primary residence for 17 years. My wife and I intend to sell our house and shelter $500,000 of our gain. In order to do so, must we be "tenant free" for 24 of the last 60 months? --Bruce C.

DEAR BRUCE: No. You can sell your principal residence with the tenant still living in the apartment.

For capital gains tax purposes you will be making two sales. One is the sale price of your principal-residence portion. The other sale is the sales price of the rental apartment.

But the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000 for a qualified married couple (up to $250,000 for a single home seller) applies only to your capital gain profit on the principal-residence portion. That's presuming you both occupied your primary residence at least 24 of the last 60 months before the sale.

The capital gain on the sale of the rental apartment has two components. One is the "recapture" tax at the special federal tax rate of 25 percent for the depreciation you deducted after May 6, 1997. The other part of the capital gain on the rental apartment is taxed at a maximum federal tax rate of 15 percent. For full details, please consult your tax adviser.

EVICT TENANTS IF YOU FEEL STRONGLY ABOUT THEIR BREACH OF LEASE

DEAR BOB: What recourse do I have when my rental tenants don't honor the terms of their lease? The house they rent from me has a nice yard. The lease terms require them to maintain the property. But the trees look like they are dying. I asked my tenants to water the trees, but they say they don't have time. What are my options to have them honor their agreement to maintain the property? --Lisa D.

DEAR LISA: Even if your tenants have a lease, if it requires them to maintain the yard and they fail to do so, you can evict them if you feel strongly about their breach of the lease terms.

Just follow the state unlawful detainer (eviction) procedure, such as delivering a "Notice to Quit" and then filing the court lawsuit. If this is your first eviction, I suggest you hire a local attorney who specializes in evictions so you can learn how it is done.

If the lease is about to expire and you don't want to evict, you have another alternative. It is to substantially raise the rent (presuming no rent-control limit applies). The tenants will then either move out or you will have the extra rent money to hire a gardener to keep the yard and trees looking good.

CHECK SPOUSE'S DEBTS BEFORE ADDING HER TO HOME TITLE

DEAR BOB: I want to add my spouse (not married) to my deed. We want to take advantage of that $500,000 tax break when I sell our home. But I want to be sure she has no liens before I do this. She had several loans with her ex-husband and then a bankruptcy. She went to our local courthouse and was told there were a couple of liens but it looks like they were cleared. How can I verify this before proceeding? --Harry G.

DEAR HARRY: You say you want to add your spouse's name to your deed but you're not married. If she is not married to you, she is not your spouse.

The only way to be sure she doesn't have any liens that could attach to your home's title if you add her name is to obtain a new owner's title insurance policy. Before issuing such a policy, the title insurer will thoroughly check for possible judgments and other liens against her. Her informal search at the courthouse was a waste of time.

However, if you are legally married to her and you want to claim the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000 (instead of $250,000 for a single home seller), her name does not have to be on the title. However, to qualify for the $500,000 exemption, you both must occupy your principal residence at least 24 of the last 60 months before its sale. For full details, please consult your tax adviser.

www.LagretRealEstate.com