Buyers demand $500 security deposit with Title co. as part of inspection Addendum #realestate

DEAR BENNY: We are selling a $620,000 home. As a part of the inspection addendum, the buyers are demanding that we put down a $500 security deposit with the title company, refundable if there is no damage to the home between now and move out. Our home is in superb condition. The refund of our money would be based on the buyer’s subjective opinion, because they included no specifics on how they would determine if we would receive the money back. (They also have asked for every single nit-picky item that the inspector found to be remedied). What are the pitfalls of agreeing to put down this deposit and how do we protect ourselves? –Shelly

DEAR SHELLY: If that’s the only way to save the sale — especially in today’s market — I would go along with their request. You could have an attorney prepare an escrow agreement, spelling out the terms and conditions by which the moneys would be returned, but the legal fee involved would not be worth it.

Put the money in escrow and know in the back of your mind that you probably will never get any of it back.

However, you should insist that the buyer has a walk-through of the house the morning of settlement, to determine the condition of the house. You or your real estate agent should be present to observe.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.

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The value of the house on the date of death becomes the property’s new tax basis

DEAR BENNY: My parents’ house is paid off. The house is in my father’s name only; my mother has his power of attorney (and I have hers). My father is in a nursing home, recovering from a stroke, but we do not foresee him coming home (he’s 86); he’s wheelchair bound, and conversant, though with some short-term memory problems.

My father’s last will and testament leaves everything to my mother. Is there any reason to get my mother’s name added to the deed? If so, what are the legal steps one should follow to get it done? If it is done, I assume it should be joint tenants with rights of survivorship? –C.H.

DEAR C.H.: Normally, I don’t recommend putting children on title with the parents, as there can be taxable consequences. In your situation, however, I think your suggestion makes sense.

While we don’t like to think about death, it is inevitable. When both of your parents die, whoever inherits the house will get what is known as the “stepped-up” basis. That means for tax purposes, the value of the house on the date of death becomes the new tax basis of the property.

Currently, when your dad passes, you will have to probate his last will and testament. However, if your mother is added to title as “joint tenants with right of survivorship”, she will automatically own the house at that time, and probate will not be necessary.

Your mother should also have a will. In fact, in addition to a will, all of you should have a general durable power of attorney, a durable power of attorney for health, and a living will. Just make sure that your father is mentally competent at this time to prepare all of those documents.

An attorney can assist you with all of this.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.

Unmarried co-titled adults fulfilling 24-out-of-60-month occupancy eligible for 250K exemption

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DEAR BENNY: My partner and I have a very serious decision to make quite soon. Can unmarried, co-titled adults on a property, having fulfilled the 24-out-of-60-month occupancy requirement each be eligible for the $250,000 exemption? –Pamela

DEAR PAMELA: The answer is yes. So long as both of your are on title, and have owned and lived in the property for two out of the five years before the property is sold, each of you is entitled to take the up-to-$250,000 exclusion of gain.

For more general information, I suggest that you go to http://www.irs.gov, click on Publications, and access and print Publication 523, entitled “Selling Your Home.” In fact, the Internal Revenue Service has a number of publications on many aspects of real estate, and all are free and worth reading.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.

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Opening up what is known as “ancillary” or “foreign” probate

DEAR BENNY: I live in Florida and am executor of the will of a friend in New York City who owned a one-half interest in a condo in Ocean City, Md. She wanted to give that interest to my nephew upon her death. How do I go about transferring her interest to him? Do I need an attorney? –Ronald

DEAR RONALD: Even if you went through probate in New York, since the deceased owned property in Maryland, you will have to open up what is known as “ancillary” or “foreign” probate in Maryland. It’s not too complex, although you may want to retain a local attorney in Ocean City to assist you.

Once the Maryland court probate proceeding has been established, you should have no problem issuing a personal representative (executor) deed to your nephew. To avoid any issues of conflict of interest, I assume that the will specifically states that the property interest is to go to your nephew.

I sold one investment condo and bought another one under the 1031 exchange…

DEAR BENNY: I understand that a couple is allowed up to $500,000 free from taxes on any profit made in their residence when it is sold. My situation is this: I sold one investment condo and bought another one under the 1031 exchange, and later sold the house I lived in and made the 1031-exchanged condo my home. Do I have to pay the delayed taxes on the 1031 exchange when I sell this condo property? Since it is now my home, and has been for more than five years, if we sell it shouldn’t we get the benefit of the full allowable appreciation of up to $500,000? –Gene

DEAR GENE: Because you have owned and lived in the house for five years, if you are married and file a joint income tax return with your spouse, you are eligible to claim the up-to-$500,000 exclusion of gain.

A couple of years ago, all you had to do was move into the replacement home, which was involved in a 1031 Starker exchange, live there for two years, and then take advantage of this gain exclusion. However, Congress plugged this loophole in 2004. Now, if the home was acquired in connection with a 1031 exchange, and you ultimately opt to treat it as your principal residence, you can take advantage of this exclusion only after you have owned it for a full five years. Section 641 of the American Jobs Creation Act of 2004 has imposed a five-year restriction on this loophole. The new law states: “If a taxpayer acquired property in an exchange in which section 1031 applied, (section 121(d)) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.”

It’s still a good way to avoid having to pay any capital gains tax, so long as you have owned the property for a full five years. You only have to use it as your principal home, however, for two out of the five years before it is sold.

 

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.

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…I have been informed that I will be eligible for the $500,000 IRS tax exemption.

DEAR BENNY: There appears to be much confusion on the taxation liability of the funds on the sale of a house. I purchased a home for $300,000 in 2000 and will be selling it for $800,000 this year. I have lived in the property for the full duration and file joint tax returns with my wife. I have been informed that I will be eligible for the $500,000 tax exemption, and must pay taxes on the balance of the sale ($300,000) even though I will be purchasing a new home for $400,000. I was always under the impression that $500,000 was tax exempt (joint filing) against the profit and any further funds from the sale were tax exempt as long as I purchased another property for my primary residence of equal value or more. –Peter

DEAR PETER: Let me try to clear up any confusion you may have. If your home cost you $300,000 — ignoring any improvements you may have made over the years — and you sell it for $800,000, you will have made a profit of $500,000. The law states, very clearly, that if you have owned and lived in the house for at least two years out of the five years before it is sold, and if you are married and file a joint tax return with your spouse, you can exclude up to $500,000 — which in your case is all of that profit. (If you are single, the exclusion is limited to up to $250,000 of your profit.) Congress abolished the old “rollover” rule in the 1990s. That rule stated that you do not have to pay any capital gains tax if, within either two years before or after you sell one house, you buy another one whose value is equal to or greater than your former property. But that’s no longer the law. From your example, it appears that you will be able to exclude all of your profit and not pay any tax. There is one caveat, however. Let’s look at this example. In 1990, you bought your first house for $100,000. In 1995, you sold it for $300,000 and bought your present home for that same amount. In those days, you were eligible for the “rollover,” which meant that while you did not have to pay any tax on your $200,000 profit, the tax basis of your new house (which you bought for $300,000) is reduced by the amount of your profit. Thus, even though you paid $300,000 for your present home, your tax basis in our example is only $100,000 ($300,000 minus $200,000). So if you sell your house for $800,000, for tax purposes your profit will be $700,000 ($800,000 minus $100,000), and while the first $500,000 will be exempt from tax, you will have to pay tax on the additional $200,000 profit. Talk with a financial adviser about your specific situation.

 

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.