Tax/Real Estate Question?

17 years ago

Anyone here an American tax accountant or know about real estate?

The situation: We own one home (A) that's considered our Primary Residence--no mortgage (valued at about $230,000 or so). We also own a second home (B) that will become our PR, once DH retires in 2 years--has a 5 year balloon (about $172,000) mortgage, which we should be able to pay off once A sells.

and then there's House C--we own aprox. 18% of it outright, and an additional 12.5% is ours via an inheritance from someone who died this past month. House hasn't yet been appraised, but knowing the RE market in the area where it's located, it will probably be worth a minumum of $400,000--possibly a good deal more, even in this economy. Because it's owned by 4 people, in varying %'s, it will need to be sold for the division to occur.

Now, here's my question, if anyone knows. With 2 houses to sell (A & C), given the situation I've described, is there any advantage or disadvantage (tax or otherwise) if they both are sold in the same year? I'm sure the administrator of the estate will probably want to clear things up and most likely will list House C within the next few months. We were just about ready to put house A on the market (within the next month). Is there any reason to either push to have both properties sold within the same calendar year? or to space out the sales between this year and next?

A little more info. Since we're only paying one mortgage, we can handle holding on to both (A & B) for another year or so, if it would be advantageous. An added temporary benefit is that House A is 1.5 miles from DH's work, if we sell now, he'll be commuting 30+ miles each way for the next 2 years, until he retires--so keeping both houses (A & B) isn't the worst thing (as long as we can eventually sell for enough to pay off the mortgage on House B). Of course, we are paying double insurance, electric, gas, water, sewer, etc--so paring down to one house would be a savings from that standpoint. And DH MIGHT consider retiring sooner than 2011, once we've moved away from his workplace.

The inheritance situation obviously came up out of the blue--we weren't necessarily expecting it to occur at this time, so we hadn't really factored it into our plans last year when we bought house B. I will be talking to my accountant in a few weeks (won't bother him until after he's had a chance to catch his breath after the 15th--LOL), but in the meantime, just wondered if anyone on here had any ideas on this situation, or could suggest any further questions/concerns I should address with my accountant. I will be asking him what kind of things I can do to minimize any tax liability in this situation--he's great helping set that sort of thing up legally and honestly.

Thanks for reading this L-O-N-G post and for any ideas.

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Comments (6)

monica_pa Grieves
17 years ago
You need a CPA in NJ to answer this.
Although the Fed rules are standard on inheritance and capital gains....the state tax laws can be very different.

I know for a fact that Pa and NJ are very different.
chisue
17 years ago
House C: If this is an investment property, would you consider doing a 1031 tax free exchange with your portion of the proceeds - investing all or some of it in another investment property and deferring capital gains? You'd have 180 days from the time of the sale to close on another property. (You must 'park' the proceeds in an escrow account in the interim -- not take possession of them.)
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You're not crazy and it WILL work! :) New roof and new furnace? Talk those up when you sell it ~ those are major expenses if they need to be replaced, so it sounds real good that they're new. Find the receipts if you can and give your real estate agents copies when you list it. Ditto for the siding and bay window. Siding is another nice thing to be new when you're selling. Floors are important. You know how everything looks great right after you vacuum, even if there are a few clothes on the couch and everything needs dusting? ;) Fix those floors if you can right before you put it on the market, even if you just do a quick sand/buff job on the wood and put in cheapo linoleum elsewhere ~ it's new and clean and will look good for the moment. Fill the holes in the walls ~ white toothpaste works great on a white wall and is so easy. If you can touch up the walls inside, do. Even if you don't have any paint left from the last paint job, but can computer match it at the paint store. Attempts at touching up look better than no attempt at all. Bathrooms and kitchens are "in" right now and everyone wants a custom job, so I wouldn't worry TOO much about them as whoever buys your house will probably want to do something different anyway. Fix anything that won't allow for immediate move-in or just looks really bad and leave it. And remember curb appeal. Go out to the street in front of your house and take a loooong, hard look at it, remembering that this will be the FIRST view the buyers will get of your place and you know how people go for first impressions. THAT will tell you more of what you need to do than I can. Good luck! :)!
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Tax assessors and real estate taxes work differently in every state. In my state we pay our taxes in arrears. That means in 2014 I pay my taxes for charges and assessments from 2013. It sounds like that is what happens in your state also. All re-assessments must be completed by the end of March here on a yearly basis. New construction is assessed when it is completed or soon after. Only your tax assessor can tell you when it would be assessed. Your builder and banker are probably correct, but I would make a call to confirm this.
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Don't live in NJ but that surely won't be a good thing for anyone. That might put a lot of people into a higher tax bracket. Don't think at this point that would be a good thing for this economy either. There would have to be a restructuring of the tax brackets or a threshhold whereby people under that limit would still be able to claim those deductions. Sounds like time to put pen to paper. Good luck on some better news on this one.
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Patrick, Here in NC, we use a Due Diligence Period as you are aware. The appraisal is not REQUIRED to be performed during this period. However, it is very wise to do so, because if it comes back low, the seller has more incentive now to do nothing. The buyer still has to perform per the contract, or he/she will be in default. The buyer, if they do not move forward to purchase the home at the sales price, will be in default and the seller keeps the Due Diligence Fee, AND the Earnest Money Deposit. These funds are looked at as compensatory in nature and not punitive, therefore the seller would still have the option for mediation against the buyer for the breech. Personally, I let my client's lenders know exactly what the Due Diligence date is and they know for sure that we expect the appraisal to be completed, AND delivered, at least 24 hours prior to this date. It costs about $400 for an appraisal, far less than the cumulative costs of the survey, the inspection, attorney costs (which they will charge prorated even if there is no closing), moving fees, and not to mention the emotional stress of waiting until the end to find out if the home appraises. So the arguement for waiting until the end in order to save funds is silly. Patrick, in our contracts, there is no conventional financing contingency... But, if the buyer's appraisal comes back low, and it is performed during the Due Diligence Period, they have the conventional options that would come with a financing contingency. Your buyer's agent and lender is putting your buyer at risk by not having the appraisal done during this time. They also lose all leverage to negotiate with the seller to lower the price to match the low appraisal, because the seller knows that the buyers have to perform, unless they want to lose their fee and deposit. Yes, as of 2011, when we switched over using the Due Diligence clause, the buyer will lose the Earnest Money Deposit and the Due Diligence Fee if they back out of the deal for any and or no reason except for a seller default. As far as how to entice the buyer to get the appraisal soon, you would first have to find out why they have elected to wait to do it until the very end. My guess is that their agent and their lender just dropped the ball and do not understand the repurcussions if it does come back low outside of the Due Diligence Period.
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donna_loomis
17 years ago
Chisue's suggestion is a good one. I work for a 1031 qualified intermediary in California. You can do an exchange with your 30.5% and it doesn't matter whether or not the other owners of the property do an exchange. But it will mean that you will still own another property, or part of another property (tenants in common) if you exchange. And although you will have 180 days to close, you must identify potential replacement property within 45 days of the sale. And remember, it must be investment property (i.e., a dwelling that you will rent out, or say, a portion of a shopping center, restaurant, etc.). If it is a single family dwelling, the IRS regs state that you cannot live in it for at least two years. Some of our clients choose this way to purchase retirement homes. It's not for everyone, but it is something to think about.
jannie
17 years ago
I'm not an accountant, but it will make a difference if either house is your "primary residence".
azzalea
Original Author
17 years ago
Yes, I know that. House A is our primary residence--that's essential so we can get the tax deduction when we sell that.

C isn't an investment property--so I don't know if that advice would work for us. It's a little complicated. Our 18% share is because we refused to take money from MIL's assets when we had huge legal fees when other relatives were stealing from her. We were legally entitled to be repaid for bringing the matter to the court's attention, but as the outlaws had already stolen a quarter of a mil from her, we weren't comfortable taking even a penny of the little she had left for her end care (she had Alzheimer's). The lawyers (ours, MIL's financial guardian, and the out-laws' lawyer) and came up with the solution that they'd put a percentage of the house in our name which we'd get after she died. She did (outlaws never even told us, so we missed the funeral, but that's another post, GRRR). So, long story short--I'm not exactly sure how you would classify that bit of property--we've owned it on paper for a few years, but haven't had use of it, nor income--but we also haven't had any expenses for it's upkeep, either. So it's all a little complicated. Only thing I know, is that we really couldn't afford the money we put out at the time--but we felt we couldn't afford NOT to either, and now my sweet MIL is at peace, and we will finally recoup what we spent to protect her from a bunch of folks who professed to love her with their mouths, while they were shoving their hands into her pockets.

But I do appreciate the suggestion and will bring it up when I get to sit down with my accountant. I was sort of thinking that I might want to invest in some sort of property eventually, once we've liquidated all this extra real estate we've found ourselves holding at the moment.
donna_loomis
17 years ago
It doesn't matter if property C is investment property or not. You could still exchange. And you could combine the funds from the sale of your portion of property C with funds from the sale of property A or B (i.e., sell two properties) and purchase only one other property (property D). You would then pay taxes on only funds over and above the purchase price of property D.

Tax/Real Estate Question?

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