Wednesday, June 27, 2007

Marital Primary Residence Exclusion on Death of Spouse

I’m often asked whether the 500K marital exclusion carries over upon the death of a spouse. The answer is not always straight forward.

Typically, if both spouses owned and lived in a home for at least two of the last five years and file a joint return, there is a 500K exclusion on capital gains tax when the house is sold.

If one spouse dies and the house is sold in the same tax year, a joint return can still be filed and the exclusion taken. Otherwise the exclusion drops to 205K for the remaining spouse.

However, other tax rules may come into play.

If the deceased spouse passed their portion of the home to the surviving spouse, in most cases the surviving spouse receives a step up in basis for the half they just inherited. So, if the house was purchased for 100K and each spouse owned 50%, each have a cost basis of 50K. If the house is valued at 400K when the first spouse passes away, their half is now stepped up to 200K, so the remaining spouse now has a new cost basis of 250K.

Also, if the couple lives in a community property state, the remaining spouse may qualify for a 100% step up in basis if the property is titled as community property with rights of survivorship.

Rules vary from state to state, but finding out how you would be affected if you are married and your spouse passes away is crucial. It is a discussion every couple should have, as it is certain we will pass on and we commonly don’t have a say as to when this will be.

Most couples have no idea how the death of their spouse will affect their financial future. Children with aging parents should also take an active role in making sure their parent’s affairs are in order.

Paula Straub

Fill out a qualification questionnaire and find out if you qualify to hang onto your capital gains.

Monday, June 25, 2007

Q and A Regarding "Intent" and the IRS

When it comes to taxes, the IRS does often look at “intent” to determine whether certain things qualify for certain tax rules.

Such as, when you purchase a property, do you intend to hold it for investment purposes or is your intent to fix it up and sell it right away?

I got a question today from a military individual stating he had purchased a property that was “going to be” his primary residence, but he had never lived there and had rented it out since purchase. He had been renting in another state for the last few years.

Now he wants to sell and wanted to know if he can qualify for the personal residence exemption.

Unfortunately, he can’t. To satisfy the test for exemption you have to both own and reside in a primary residence for at least 2 of the last 5 years. Intent to live there does not come into play unless you actually do.

And, no, it also doesn’t matter if he sells the “intended” house and buys a new primary residence and lives there immediately. He still doesn’t qualify for the exemption.

One possible option, if he is patient, is to do a 1031 exchange on the property he is selling and purchase a home he would eventually like to live in. If he rents out the new place for a couple of years, and then moves in, he can eventually (after 5 years) in this case, qualify for the personal exemption when he sells.

Paula Straub

Fill out a Qualification Questionnaire and find out if you qualify to hang onto your capital gains.