Q: I own a six-unit apartment building, in which my wife and I have a large profit. If we make an outright sale, we will owe a huge capital gain tax. My wife remembered an item in your column saying we could make a tax-deferred trade of the apartment building for our dream home, then we could sell the house in a few years to claim $500,000 tax-free profits. Is there a minimum holding time for the house?

A: Yes. You first can make an Internal Revenue Code 1031(a)(3) Starker tax-deferred exchange of your apartment building for your dream home. However, please remember the basic Starker exchange rules:

– You must trade equal or up in both price and equity.

– You can’t take any taxable “boot” such as cash or net mortgage relief out of the trade.

– Sales proceeds from the apartment building must be held by a qualified third-party intermediary accommodator.

– You have only 45 days after the sale to designate the replacement property.

– You must complete the title acquisition within 180 days.

– The house you acquire must be a rental at the time of acquisition.

Although there is no official IRS answer, most tax advisers suggest renting the acquired residence at least six to 12 months (to show investment intent) before converting it into your personal residence.

To qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $500,000 for a married couple filing a joint tax return, you and your wife must occupy the principal residence at least 24 of the 60 months before its sale.

For residences acquired in an IRC 1031 tax-deferred exchange, you must hold the principal residence at least 60 months to qualify for those exemptions. This five-year rule applies only to residences acquired in a tax-deferred exchange. For other principal residence sales, the minimum holding time is only 24 months (presuming the owner occupied the principal residence for the same period).

For full details, consult your tax adviser.

Q: There is a house in my town that has a “for sale” sign from a real estate brokerage that is located at least 125 miles away. Why would any home seller list with an agent whose office is so far? I might be interested in buying the house. Are there any special precautions? I tried phoning the brokerage and was told I had to have my own buyer’s agent call to inspect the house. Should I be wary?

A: There are many possible reasons that the house is listed with an out-of-area agent. For example, many FHA, VA and bank foreclosures are listed with one or two brokerages that handle sales throughout an entire region or state. Frankly, this makes managing multiple foreclosed properties easier for the lender, but it is not the best way to earn top-dollar sales price. No out-of-area realty agent can do as good a sales effort as a local agent.

Another reason for listing with an out-of-area realty agent is the home seller might be a friend or relative of the listing agent. That’s no way to hire a listing agent, but many people do it anyway.

As a buyer, you definitely need your own agent when attempting to buy a home listed with an out-of-area agent. Often, the house doesn’t have a lock-box and inspection access is not easy. Or it might be difficult to negotiate with the home seller through the out-of-area realty agent.

Q: As a law student, I have become interested in possibly investing in probate properties. But I find there is little interest among real estate agents in listing and marketing such properties. Why? Do you think the probate property field is less crowded than for other investment properties?

A: There are far fewer probate properties being sold by estates than there are other properties listed for sale on the open market. As an investor, I’ve purchased several probate properties, but none was a simple routine sale. Dealing with heirs, executors and attorneys is rarely easy.

One time I made an offer to buy a probate property where I later learned 29 heirs had to sign the acceptance. I quickly realized that property was a waste of time unless one heir could speak for the entire group.

An excellent recent book to read for more information on this topic is “Creating Wealth Through Probate,” by James Banks.

Q: Can I sell my house, plus my rental house, and buy one house for my children and me to live in a better neighborhood without having to pay capital gain tax?

A: Thanks to Internal Revenue Code 121, if you have owned and occupied your principal residence at least 24 of the 60 months before its sale, you can sell it and claim up to $250,000 tax-free capital gains (up to $500,000 if your spouse also meets the 24-month occupancy test and you file a joint tax return in the year of home sale).

However, the only way to defer capital gain tax on the sale of your rental house, and to avoid the dreaded 25 percent “recapture tax” on depreciation you have deducted, is to make an Internal Revenue Code 1031 tax-deferred exchange for another similar rental or investment property of equal or greater cost and equity. For full details, please consult your tax adviser.

Q: My mother, 88, wants to sell her home so she can move to an assisted living residence where several of her friends live. I am in favor of the move so someone will be watching out for her and I can stop worrying about her.

But my problem is that my name was placed on her title, upon the advice of her lawyer and tax adviser, about 10 years ago. The reason was because I paid her property taxes and mortgage payments. By being on the title, I could deduct the interest and taxes paid. When she sells her house, will I be taxed on part of her profit (about $175,000)?

A: You can simply sign a quitclaim deed to get your name off the title to her home before the sale. Your tax adviser might suggest filing a federal gift tax return, although no gift tax will be due if your lifetime non-exempt gifts are less than $1 million.

Q: I usually agree with your advice. However, I strongly disagree with your recent item where you said a home buyer might have to pay his or her buyer’s agent if a home is purchased from a “greedy” do-it-yourself home seller who refuses to pay the agent half of the customary sales commission. Home sellers have the right to sell their homes alone without having to pay a sales commission. Why don’t you mention the “greedy agents” who charge a 6 or 7 percent sales commission just for filling in a few blanks on a sales contract?

A: Most “for sale by owner” house and condo sellers are only too happy to pay a sales agent who produces an acceptable buyer 50 percent of the customary sales commission, usually 3 percent of the sales price.

However, some “greedy sellers” don’t understand the benefits of having a buyer’s agent represent the buyer. Those buyers’ agents do double-duty of guiding the sale to a successful completion. Yet, some sellers stubbornly refuse to pay the buyer’s agent even half of a normal commission, so then the buyer might become obligated to pay his or her buyer’s agent.

As for your comment about “greedy agents” who charge 6 or 7 percent sales commissions, are you aware how sales commissions are split among sales agents and their brokerages? Usually, the listing agent and the buyer’s agent receive half of the gross sales commission. Then half of that portion of the commission goes to the brokerage. Of course, the exact split of the sales commission depends on each agent’s agreement with their brokerage.

The result is what seems to you like a huge sales commission is split four ways and the agents really aren’t as “greedy” as you might think.

Send questions to “Real Estate Mailbag,” 251 Park Road, Burlingame, CA 94010 or go to www.bobbruss.com and click on the link “Ask Bob a Question.”

Source:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/05/06/REGR7PG7ME1.DTL