The Weekly Real Estate Mailbag
Robert J. Bruss, a real estate attorney and broker, answers housing-related questions from readers a weekly column. In his most recent Q & A session, he addresses gift deeds, tax laws, and the implications of backing out of a contract for lack of a Florida mortgage.
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Q: My wife and I married eight months ago. Before marriage, she owned her condo and I owned my single-family home. Both served as our principal residences for several years. Now we want to sell both the condo and the house in 2006. Can we do so and each claim the $250,000 tax exemption?
A: Yes. If your wife held title to her condo in her name alone, and meets the ownership requirement and occupancy test of Internal Revenue Code 121, in which she has lived there 24 of the last 60 months, then she can claim up to $250,000 tax-free on the sale of her principal residence. The same applies to you if you meet the tests for your house.
Q: About 10 years ago, my parents gave me a gift deed to their house for which they paid about $57,000 many years earlier. Today, it is worth a lot more, around $275,000. They continued living in it ever since. Now they want me to sell it so they can use the money to move south and buy some Florida real estate.
I’ve been paying the property taxes, as well as the repairs on the house all these years. It doesn’t seem fair that I should have to sell the house. Would I owe any tax on this sale?
A: Yes. Your situation is another bad example of why it usually is not smart for parents to gift real estate to their adult children.
I am surprised that after letting your parents live in the house they gave you and paying its expenses, they want you to sell it and give them the money to move to Florida. To make matters worse, as the recipient of the deed, you took over their low $57,000 adjusted cost basis.
Your taxable capital gains will be the approximate $218,000 difference between your $57,000 cost basis and the $275,000 adjusted (net) sales price. If they had retained title, their sale profit would be tax-free thanks to the Internal Revenue Code 121 principal residence sale exemption up to $250,000 (up to $500,000 for a married couple filing jointly).
However, since the property wasn’t your principal residence, although you generously paid its expenses, you can’t qualify for this tax break.
Q: Several months ago, we contracted to buy a new house under construction. Now we have learned several very unfavorable things about the builder and the subdivision. We applied for a Florida home loan but the best we can get is far worse that what was specified in our purchase contract. Can we cancel the purchase and get our $10,000 good faith deposit refunded?
A: To cancel a home purchase contract due to inability to obtain a Florida mortgage on the terms specified in the purchase contract, you must show a good faith effort to obtain such financing. If you just applied with one lender, that’s not enough. However, if you were turned down by several, that demonstrated good faith and should entitle you to a refund of your $10,000 deposit.
