ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, September 30, 1996 TAG: 9610010103
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: I know that if I were to sell my house, I would have to put the money back into another house within a two-year period to avoid paying taxes on the whole amount of the sale.
If I were to sell the house and spend the money on improvements to my future husband's house, would I still have to pay this tax? If the house was deeded in both our names, would that be the same as investing in another house?
A: C.J. King, a certified public accountant with the Roanoke firm of Cole & King, said it's important to clarify that you must purchase a replacement home that costs at least as much as the net sales price of your old home in order to defer the entire gain when selling a home.
The amount of equity (or money from closing) to be reinvested is not a factor in determining how much gain can be deferred, King said.
Spending the money from your house on improvements to your fiance's house would not help you defer gain on your home sale, King said. To defer gain, it must be a "purchase." Transferring title between spouses can be done as a gift, King said, but the transfer of title does not qualify as a "purchase" for the gain rollover rules.
If you did an outright purchase of a portion of your future husband's home, and the purchase price plus your portion of the improvements exceeded the value of your old home, King said, you could defer the gain on your house.
However, the sale of a portion of his house to you would trigger any gain built into his house.
Your situation points out one of the major injustices of the tax system, King said. If two people own their own homes before marriage, and these homes have appreciated so that the sale of either would produce a gain, then the marriage penalty results. The only way to avoid it, King said, is if the couple can afford to purchase a replacement house that is twice the value of the more expensive of the separately owned homes.
As an example, King said, You might have a home with a fair market value of $100,000 vs. costs and improvements of $80,000 for an unrealized gain of $20,000. Say your future husband's home is also worth $100,000 but costs and improvements total $60,000 for an unrealized gain of $40,000.
To fully defer the gains on both homes, King said, you would have to sell both homes and jointly purchase a $200,000 replacement home.
If you cannot afford to buy a $200,000 home, in this example, he said, there are two alternatives.
First, you could sell your house (because there is less gain to recognize) and move into his home. Then you can wait at least two years to sell his house and jointly purchase a replacement home costing more than the net sales price of his residence.
With this alternative, King said, you will recognize $20,000 of the gain but, using a special spousal consent election to reduce the basis of a jointly owned replacement residence, the entire $40,000 gain on the sale of his home can be deferred.
Alternatively, you could rent out your home and move into his house. As long as you hold the house as rental property, the gain will be deferred. But when you eventually sell the property, King said, gain must be recognized unless it is sold through a like-kind exchange.
If you or your future husband is 55 or older and has lived in the home for at least three of the last five years, you can each individually elect to permanently exclude up to $125,000 of gain from your respective homes, King said.
If both of you are older than 55, he advised, it is often better to sell both homes before marriage and use your individual exclusions to avoid up to $250,000 of gain. When you marry, you jointly will have only one $125,000 exclusion. If you marry someone who is over 55 and has already used his exclusion, King said, you will lose yours.
The regulations governing home sales are complex and the direction you should take depends on the gain locked into each house. King urged you to consult a certified public accountant or tax attorney to map out a strategy that will minimize the tax bite.
Several readers said they were unable to find at bookstores a paperback book by the American Bar Association entitled "Guide to Wills and Estates." The book, which was recommended in this column last week, can be ordered by calling Random House at a toll-free number: 1-800-733-3000. It was published by the Times Books division of Random House.
LENGTH: Medium: 82 linesby CNB