Question: I'm a Navy officer on active duty. I purchased home #1 in 1999, lived in it for three years, was transferred to another state, and then rented the property from 2002-2004. We purchased home #2, which I have been living in for the last three years. We sold home #1 in April 2004 for a moderate profit. We are planning to sell home #2 this summer due to my deployment to the Persian Gulf and my subsequent transfer shortly thereafter. Am I going to be forced to pay capital gains tax on one of the two homes because, the sale of two homes is within two years?
Answer: First, we are grateful for your service. Second, there are some special rules which are important in your situation.
Generally, you can totally avoid a capital gains tax on the sale of a personal residence by using the property for two of the past five years. "You meet the tests," says the IRS, "if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 x 2) during the 5-year period ending on the date of sale."
However, there are several exceptions to the general rule. Among them:
You may be able to shelter some or most profits if you were forced to move at least 50 miles for a new job, because of health issues, or for other reasons.
Also, there are special rules for those on active duty under the Military Tax Relief Act of 2003 . It provides that:
"A taxpayer on qualified official extended duty in the U.S. Armed Services or the Foreign Service may suspend for up to 10 years of such duty time the running of the 5-year ownership-and-use period before the sale of a residence. This applies when the duty station is at least 50 miles from the residence -- or while the person is residing under orders in government housing -- for a period of more than 90 days or for an indefinite period. This election, which is an option for the taxpayer, applies to only one property at a time. Retroactive for home sales after May 6, 1997. Although taxpayers normally have only three years to file an amended return, qualifying taxpayers who sold a residence before 2001 had until Nov. 10, 2004, to amend their returns for this purpose. Military personnel and individuals in support of the U.S. Armed Forces serving in a combat zone during the period Nov. 11, 2003, through Nov. 10, 2004, may be entitled to additional time to amend their returns. Taxpayers amending a return to use this provision should put "Military Family Tax Relief Act" in red in the top margin of Form 1040X."
The bottom line is this: You've got more than two years of residency in the past five years with the second home, that may also be the case with the first property depending on the specific dates of purchase and sale, and you can look to the Military Tax Relief Act and general exceptions if necessary for the first property. For details, speak with a tax professional. For general information see the IRS web page relating to those in the Armed Forces.
Question: Our neighbors have pit bulls. One came on our property and tried to attack my husband while he was mowing our lawn. Plus the dog almost got my other neighbor and her two little dogs.
I have called the pound, they said if the dog gets off of the owner's property to call them and they will come out. I called them when the pit bull almost got me plus our sheriff department and nothing was done. I have e-mailed my senators and governor. Nothing. I can't even get a leash law enforced. We are all praying that the good Lord will finally move them. What can we do?
Answer: Pet owners have a responsibility for their animals. When a potentially-dangerous pet is involved, the stakes in such matters are serious. Get a video camera, record examples of the dog off the property and then, speak with an attorney to see if there are grounds for a suit by you and your neighbors against the dog owners. Then ask if you can sue the local government for failing to enforce its own regulations. Sharing your video with a local TV station might encourage assistance from local officials....
Question: I brought a multi-family property in July 2004. Can I write off the mortgage I paid since July as an expense? Does this apply to a second home/rental or in my case, a multi-family three-unit dwelling?
Answer: The properties are treated differently for tax purposes.
The three-unit property is investment real estate. Mortgage interest is a cost of ownership and is generally deductible in the year paid.
Interest on a total of $1.1 million in personal mortgage debt is generally deductible for first and second homes. Even if you are within the $1.1million limit, however, your ability to deduct mortgage interest on a personal residence will phase out above a certain income level. Speak with a tax pro for details.
Question: I am relocating to another city and have had some difficulty selling my home.
I was recently contacted by a real estate investor regarding a lease purchase agreement for my property. I would get full-price for my property and the investor would make all loan, tax, and insurance payments.
The investor would rent the house to tenants and the tenants, would have a right to buy the property at a specific price. Should I enter into a lease-purchase agreement?
Answer: Why do you need an investor? If you want to lease the property for the next few years contact a broker and have it rented.
What is the investor investing -- how much cash are you getting up-front? Ten percent? Twenty percent? What if the property is leased but the tenant elects not to buy? Why lock in a sale price now when home values nationwide are generally rising? If the property is such a good deal, why doesn't the investor simply buy it from you and then rent it?
Can the "investor" assign (sell) the contract to someone else? Would you receive a penalty? How much? What happens if the investor does not make your mortgage or other payments? What happens if the tenants damage the property? If the tenants are there more than three years, what happens to your ability to shelter capital gains taxes?
If you want to sell the property, get a local broker, price it right and it will sell. At closing you will get paid for your interest in the property, have no tenant worries, and the money you receive can be applied to the purchase of a replacement property. In any case, do not sign a lease purchase agreement or any other paperwork without first contacting an experienced real estate attorney.
Question: My husband and I are looking to purchase a home. I currently own my home, however my husband is a first-time buyer and we were wondering what programs are available to us.
Answer: The definition of a "first-time" buyer may not be what it seems; that is, some programs define a first-time buyer as someone who has not owned for two or three years rather than someone who has never been on a real estate title.
However, in your case the issues are a little different.
Are you buying as husband and wife? You are now an owner -- does that mean both of you buying jointly could be considered "first-time" purchasers?
More importantly, if you buy under a first-time program, say with mortgage credit certificates (MCC financing) would your ability to sell and get profits be restricted?
Rather than a first-time loan program, why not a regular mortgage? There are plenty of loans out there with little down and liberal qualification standards where ownership status is not an issue.
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