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Must current home be sold to qualify?

Benny Kass
Inman News

DEAR BENNY: My wife and I are considering a move to Arizona. As we have lived in our current townhome for six years, I am sure we would be eligible for the homebuyer credit of $6,500. What I cannot find is any reference about if and when we must sell our current home. Can we buy a replacement home by the cutoff date of April 30, 2010, then sell our current residence later in the year? Or if we make the new house our principal residence, are we required to sell our current residence at all? --John

DEAR JOHN: According to the Internal Revenue Service, you do not have to sell your current house -- which must have been owned and used as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence -- in order to take advantage of the new $6,500 tax credit for repeat homebuyers so long as the new house becomes your primary house.

There are, however, some additional limitations. While you do not have to purchase a home that is more expensive than your current home to qualify for the credit, if your new home costs more than $800,000, you are not eligible for that credit.

There are also income limitations. For single taxpayers, you cannot make more than $125,000 annually; for married folks, you cannot earn more than $225,000 if you file a joint tax return. There is a phase-out until your income reaches $145,000 for a single taxpayer or $245,000 for joint tax filers. This means that the credit is reduced proportionately until you reach the ceiling cap.

You cannot purchase the new home from family members, which includes parents, grandparents or children.

And finally, the purchase must take place by April 30, 2010. However, if you have entered into a binding contract before that date, you must settle (go to escrow) by June 30, 2010, or you will lose this credit.

This is my opinion; I suggest you consult your own tax advisors for specific advice.

DEAR BENNY: My wife and I own a rental house that is now paid off. We are thinking of gifting it to our three daughters and their spouses. It is appraised by the county for around $100,000 and would probably fetch that on the market. We could gift it in one year at that value, but am wondering just how to do so. If they could turn around and sell it, would they avoid the recapture of taxes on the depreciation? Also, would we need a professional appraisal or could we get several valuations from Realtors and take the average to come up with the amount? --Joe

DEAR JOE: You and your wife can each gift (completely tax-free) up to $13,000 this year to each of your daughters and their husbands. That comes to $78,000 ($13,000 multiplied by 6). The remaining $22,000 may have a taxable impact on you later, and you should consult with a tax attorney before you proceed with that gift.

Keep in mind that if the property is worth $100,000, and if you sell it through a real estate agent, you will have to pay a commission in the range of 5-6 percent. Accordingly, I think that you should be able to deduct this commission (which you will not have to pay) in determining the actual amount of your gift.

While a professional appraiser would be helpful, I believe that the Internal Revenue Service -- should they ever decide to look into this transaction -- would accept written valuation statements from two or three real estate agents or brokers.

When you give a gift, your basis for tax purposes becomes the basis for the giftee (the persons receiving that gift). Thus, their basis will be your depreciated basis. There will be no accumulated depreciation brought forward and there will be no recapture of depreciation.

Your daughters and their spouses should also consult with a tax attorney to determine what capital gains they may have to pay if and when they sell it.

I don't oppose your idea, but everyone should go into the transaction with their eyes open and knowing all of the facts, especially the tax ramifications.

DEAR BENNY: My daughter was in the final process of closing on a house, which was a short sale. The loan was approved and the amount offered was accepted by both the seller and the loan company. The contract was signed by both parties. However, just as we are ready to finish the process, the bank who holds the mortgage is now demanding $20,000 more.

I read your article that answered a question about short sales. From what I understand, the bank has the right to negotiate the price. However, shouldn't that have been done in the beginning of the process? My daughter's offer and earnest deposit was accepted, the house was inspected and appraised, and everything was in check until this bombshell. Do my daughter and the seller have any legal rights? Can the bank change its mind like that so far into the process? --Roseann

DEAR ROSEANN: Banks are banks and unless challenged by a government agency or a court order, they typically do what they want to do. Did your contract have a contingency for bank approval? If not, you have a binding contract, and you can sue the sellers either for specific performance (i.e., ask the court to force the sale) or for damages. In some jurisdictions, you can actually sue for both.