Tax break won't apply to sale of beach home


August 28, 1994|By Michael Gisriel

Q: My husband and I own a vacation home in Ocean City. We have decided to sell it because we don't use it as much as we used to. Since we are both in our 60s, can we use the "over-55" capital gains tax exemption to keep any gain from the sale of our beach property tax-free?

C. Tosler, Columbia

A: Unfortunately, you cannot. There are three basic requirements set out in Internal Revenue Code 121 -- that is the "over-55" tax exemption that allows older homeowners to keep up to $125,000 of their resale profits tax-free.

* 1. The property sold must have been your primary residence for three of the past five years.

* 2. At least one of you (you or your husband) must be at least 55 years old.

* 3. Neither you nor your husband may have ever taken this exclusion before.

Because you and your husband "hardly ever" use the vacation home, it would be difficult to say that it is your "primary" residence.

However, if deferring any capital gains taxes from the sale of your beach house is a major consideration, you might want to consider deferring paying taxes from the sale by using an IRC 1031 tax-deferred exchange. This would mean that you could possibly swap the beach house for another piece of property -- for example, land or even a house or condo at another vacation location that is currently owned by someone else. The rules for these so-called "like-kind" exchanges can be complex, so you'll need the help of a real estate agent, lawyer or tax expert.

Q: Are home warranties available to someone trying to do a "For Sale by Homeowner" transaction himself? If so, could you give some company names and phone numbers.

Dale Hennessey, Pasadena

A: Home warranties are available to homeowners interested in purchasing a warranty contract. These warranty contracts typically cost between $350 and $695. Two national companies that do business in Maryland are HMS (Homeowners Marketing Service) 1-800-327-9787, and AHS (American Home Shield) 1-800-735-4663.

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