You can defer gains tax by following four rules


March 06, 1994|By Michael Gisriel

Q: I am considering selling my house and buying a new one. If I sell my house, will I have to pay tax on the gain?

A: Generally, you may defer the tax on the gain from the sale of your house if you can satisfy four tests.

* You must have used your old house as your principal residence;

* You must intend to use your new house as a principal residence;

* You must buy or build your new house and use it within two years after selling the old place;

* You must buy or build a house at a cost that is at least equal to the amount you received from the sale of your old house.

About the two-year period: a purchase-and-sale contract on a new home is not sufficient; a sale occurs when the title to the property is transferred and the deed is recorded. For a new home, construction must be completed and you must occupy the house within two years.

You are not required to reinvest or spend all of the cash proceeds from the sale of your original home. You may purchase the new house with a small cash down payment and mortgage the remainder of the purchase price.

Therefore, it is possible that you could spend as little as $5,000 to $10,000 of your equity, and use the rest of your proceeds for investments, college education or savings.

Q: We pay an annual ground rent of $180 yearly. How do we go about buying the ground rent? Should we?

D. Norris, Owings Mills

A: A typical ground rent of $180 would have a par value of $3,000 and interest rate of 6 percent. In past years, when interest rates were higher, ground rents typically sold for about 60 percent par value. But in recent years, with savings bank interest rates around 3 percent, ground rent are selling close to par value.

Why not offer $1,800 -- about 60 percent of par value and see if the owner is interested? At that price, it would take 10 years to break even.

Remember, it normally costs about $200 to cover the legal and recording costs for purchasing and recording a ground rent.

If you are interested in buying, write a letter to the ground rent owners.

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