Ask Realty Times - July 8, 2005 - 7/8/2005 - Real Estate Home House Condo

Ask Realty Times - July 8, 2005

by Peter G. Miller

Answer: Married individuals can buy real estate independently. However, the ability to purchase is limited by the financial capacity of the individual buyer. In a household where both parties work, the ability of one partner to purchase could be substantially constrained by this practical financial hurdle.

In the event of a financial claim, the joint assets of a husband and wife would generally be separate from the assets of one party. However, your joint credit might be impacted and that could effect you individually.

Both you and your husband should speak with local lenders for further information. Also, contact a local attorney for information regarding financial liability, wills and living wills.

Question: I keep hearing that it's a "sellers market" and that the real estate "bubble" is going to burst. Can you tell me, if this is true, when is the "bubble" going to collapse?

Answer: The bubble is scheduled to burst next Tuesday, at 11 AM EST. Bring lunch.

Kidding, just kidding.

Many economists believe that the rate of real estate appreciation is unsupported by general economic trends and that the current rise in prices is artificially pushed by the use of high-risk loans such stated-income mortgages and 100-percent financing. Alternatively, worries about a real estate bubble are hardly new. Consider, for example, the Forbes magazine story entitled, "What if Housing Crashed?" that was published Sept. 3rd. in 2001.

The bottom line is this: First, just like stock no one knows where home values will be in the future. (If people knew where stock values were headed we would not have had a Wall Street crash several years ago.) Second, homes and stock are different -- you can live in or rent a house. Third, real estate is a localized commodity -- what happens in one area may be different than what happens elsewhere.

Question: I'm selling my home and now my wife has changed her mind about moving. The buyer has signed a sales contract and we have accepted -- is there any way to back out of the sale?

Answer: To start, not all sale agreements are completed for reasons of financing, condition, title, etc., so the deal could fall through. However, if the buyer has a valid purchase agreement accepted by both you and your wife then you are expected to work in good faith to fulfill your end of the bargain.

It may be that the buyer would accept a buyout -- cash -- to discontinue the purchase. However, you also need to consider that the broker(s) involved in the transaction have found a ready, willing and able buyer and thus are likely to be entitled to a commission for their work.

If you simply refuse to complete the transaction, then the buyers may sue for damages as well as "specific performance" -- a requirement to complete the sale. For details, speak with an attorney.

Question: I want to buy investment land using my self-directed IRA funds combined with my personal funds and hold the property title as tenants-in-common. Then I want to sell my investment condo and using 1031 exchange buy my IRA out from the title. This allows me to avoid a costly reverse 1031 exchange. However, I am concerned with "self-dealing." Perhaps if I invest my self-directed IRA into LLC, and use LLC to be a co-tenant in the land purchase, I would be able to avoid the self-dealing issue. I wonder -- do I have an issue to begin with?

Answer: Any transaction involving personal funds, IRAs, 1031 exchanges, LLCs and purchases from one's own IRA inherently raise issues of self-dealing.

As well, I am not convinced that a reverse 1031 exchange is "costly." Such a lawful device will allow you to save substantial state and federal taxes, perhaps tens of thousands of dollars or even more. The cost for legal services is relatively small -- say several thousand dollars. In the context of what you are trying to do, this seems reasonable. Moreover, it may be that a reverse exchange would allow you to avoid some of the complexities associated with the proposed transaction.

Question: We had a break-in at our house. Our house was damaged and a lot of jewelry that I bought for my wife over the years was stolen, along with other goods. More importantly though, we (especially she) are very scared to live in our home. She has nightmares and I won't come home alone anymore. Needless to say I would like to sell the house and get her into a safer environment. I looked at the IRS site and I can't tell if I can claim a partial deduction. It seems to fit somewhat in the realm of unforeseen circumstance.

The IRS says sellers can claim partial deduction if they sell in less than two years because of "natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible." However, the site it also says "you cannot claim a reduced maximum exclusion simply because you moved to improve your overall health or well-being." Should I move in less than two years?

Answer: You and your wife have had a terrible experience and reasonably want to move. Any sensible person can understand your concerns.

At the same time, it is equally reasonable to believe a break-in could happen elsewhere and that a second break-in at your current residence is statistically unlikely, perhaps less likely than a robbery at another location which to this point has been "unrobbed." Thus there is a conflict between what you understandably feel and the fact that you may actually be safer staying where you now live.

However, there are two points to be made: First, check with a tax pro to see if there are court decisions or IRS determinations which may be helpful to you. Second, address the real issue: Taxes or not, statistics or not, you need to move, you want to move.

You have lived in the property for less than two years. If values have risen, that's great. However, you are taxed on your net gain and between the acquisition price plus closing expenses and the selling price less costs so your profit may be less than you think. Whatever the profit, the tax is never 100 percent so you will come out ahead if you sell with a gain -- both financially and psychologically.

Question: I recently sold a rental property. Does the two-year capital gain rule apply for rental property? How much time do I have to pay the capital gain taxes?

Answer: You qualify for preferential long-term capital gains rates once you have owned an investment property for at least one full year. If you have held the property as an individual then the tax will be paid with your income taxes.

If you owned and sold an owner-occupied residence, you would have to have resided on the property for two of the past five years to shelter up to $500,000 in profits if married and $250,000 if filing as a single taxpayer.

For details, speak with a CPA, enrolled agent or a tax attorney. Also see IRS Publication 523, Selling Your Home.

Question: How would I find out what houses have sold in my neighborhood during the past three months?

Answer: The first choice would be to speak with a local real estate broker. He or she will be able to report on past sales shown in the MLS. However, some homes are sold outside the MLS. For all title transfers you would want to check with state and local property records and tax offices, many of which maintain information online. Even with the property records office you may find transfers where the sale price is not shown. This might happen, for example, in the case of a home sold for "good" consideration -- love and affection.

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.