Computing taxable gain from home saleQ: My lawyer and...

REAL ESTATE Q & A

April 11, 1993|By Carla Lazzareschi | Carla Lazzareschi,Los Angeles Times

Computing taxable gain from home sale

Q: My lawyer and accountant are giving me conflicting advicon how to compute the taxable gain from my home sale. Can you please resolve the matter? Our original home was purchased for $80,000 years ago, and we recently got $550,000 for it after expenses. We are eligible to use the $125,000 one-time profit exclusion available to homeowners over age 55. Our replacement home cost $300,000. Do we have a taxable gain, and if so, how much is it?

A: This oft-asked question stems from continuing confusion over whether taxpayers are able to deduct both the original home's basis (in your case, $80,000) as well as the replacement home's cost ($300,000 in your case) from the sales price (in your case, $500,000). You may not. This is true whether the taxpayer is invoking the $125,000 senior citizen exemption or not.

This is how you should compute your taxable gain: Start with your $550,000 home sale gain and deduct the $300,000 value of your replacement home. From that remainder of $250,000, deduct your $125,000 exemption. Your taxable gain is $125,000. The basis of your new home is the $80,000 cost of your original residence.

Tax liability on vacant lot sale

Q: I My sister and I own a vacant lot as joint tenants. We are planning to sell it and understand that we may have to take back a first trust deed in this market. That is no problem. However, how do we figure our tax liability for the sale?

Do we pay upon completion of the sale or when the note is fully repaid?

A: First, let's make a couple of key assumptions. No. 1: We assume that the land is fully paid for and you have no outstanding mortgage. No. 2: We assume that you and your rTC sister are not a formal partnership and have not filed a partnership tax return for the land.

With these understandings, you should compute your tax obligation for the sale over the life of the loan. At the same time, however, you must amortize your cost for the property -- your taxable basis -- over the repayment period.

Here's how it would work:

Let's say you bought the property for $2,000 and sell it for $10,000. Twenty percent of the price is the return of your initial investment, and the remaining 80 percent is your gain.

Now let's say the buyer puts down $1,000 and agrees to pay the remaining $9,000 over the next five years. The $1,000 down payment must be apportioned between your return of capital (20 percent) and your gain (80 percent). This gives the two of you a total reportable gain of $800 from the down payment, which should be divided equally between you and your sister. Subsequent payments on the loan principal are subject to the same 80-20 split.

However, this formula covers only the loan principal. Interest payments are entirely taxable as ordinary income.

Keeping tax breaks while leasing a home

Q: My wife and I intend to travel throughout the country for as long as three years while volunteering for the park system. We hope to lease our home while we are on the road. We will come home a few times every year to visit doctors, etc. We expect to return here at the end of our travels and want to keep this as our permanent residence to take advantage of all the tax breaks associated with an owner-occupied home. What can we do?

A: Everything you do should be aimed at showing in as clear a way as possible your intention to keep this house as your home. If you rent out the house, you should consider month-to-month terms rather than a long-term lease. Any payment from the renter should be as modest as possible, taking into account your need for a housesitter as well as the renter's need for shelter. You should not depreciate the home on your taxes as you would a piece of income property.

Using IRA to buy home would bring penalty

Q: I have been getting conflicting information on using my individual retirement account as a down payment for a home purchase. I remember reading that the usual 10 percent early withdrawal penalty would be waived for first-time home buyers. But now I have been told this is incorrect. What is the truth?

A: The truth is that there are as yet no provisions to dismiss the 10 percent early withdrawal penalty for IRA disbursements used to purchase a first home. Congress has been talking about enacting such a provision for years, but so far there's nothing on the books.

Perhaps the exemption to which you are referring is the one applying to 401(k) savings programs, which is not as sweeping or generous as you want. The Internal Revenue Service allows taxpayers to withdraw funds from their 401(k) tax-deferred savings plans for certain "hardships" -- a catch-all category that includes medical expenses, the purchase of a principal residence, payment of college tuition for spouses or children and payment of a household rent or mortgage where eviction or foreclosure is threatened. Your company's plan may accept additional hardship claims, such as funeral expenses, legal bills and loss of family income because of disability or a spouse's layoff.

However, even if you have an accepted hardship case, taxpayers under age 59 1/2 who withdraw funds from their 401(k) plans are, with limited exceptions, automatically hit with a 10 percent federal penalty plus any applicable state penalty.

Buying a new home, whether or not it's your first-ever purchase, is not one of the penalty exceptions. So off the top, you would be forfeiting more than 10 percent of your savings to the government. In addition to the penalties, you would be required to pay state and federal income taxes on the amount withdrawn.

Assuming you are in the highest state and federal tax brackets, a $20,000 withdrawal from your 401(k) plan would net you about $10,700 toward your down payment.

Perhaps your best bet is to consider taking a loan against your 401(k) account. Some companies allow their employees to borrow against their account totals, a strategy that avoids both the penalties and tax implications of a withdrawal.

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