For Homeowners

           

          

          

                              For Homeowners

          

          

          16) Selling your home?  Be sure you qualify for these

          tax breaks.  Fix-up expenses incurred prior to the sale

          will reduce the amount realized from the sale.  This in

          turn reduces the amount you have to invest in a new

          home to defer your gain, or the amount of taxable gain

          you will have.  But fix-up expenses must meet several

          tests before they can be used to reduce the amount

          realized.  The work must be performed during the 90

          days before the making of a sales contract that results

          in a final sale.  The expenses also must be paid no

          later than 30 days after the sale is completed.  The

          costs must not be capital expenditures or improvements

          (in which case they are added to your property's basis)

          and must not be otherwise deductible.  If your fix-up

          expenses do not meet these tests, you have

          non-deductible personal expenses.  So time your fix-up

          work carefully.

          

          17) Sell your home, but don't move.  The tax benefits

          can be outstanding.  When you are over age 55 and sell

          your principal residence, you can exclude from income

          up to $125,000 of gain on the home.  You must have

          lived in and owned the home for three of the last five

          years, though the ownership and residence need not be

          for the same three years.  You can use this provision

          to sell the home to your children or other family

          members.  The buyers won't need to put up any cash or

          qualify for a commercial mortgage.  The sale can be a

          private loan to the buyer, installment sale, or private

          annuity.  In any case, you will be receiving regular

          payments for a period of years or for the rest of your

          life.

               You will have turned your home's equity into cash

          without moving.  You also will have removed the home

          from your estate and transferred it to your children. 

          The children can let you live in the home rent-free. 

          The fair rental value of the home would be a gift from

          them to you.  An alternative is for the children to

          charge you fair market rent.  If you are charged rent,

          the children get depreciation deductions and other

          rental tax breaks.  Thus you will have helped them

          reduce their tax bills.  This strategy is extremely

          flexible and can be adjusted to meet the particular

          needs of you and your children.  (Letter Ruling

          8502027).  This is a good way for children to put a

          couple of hundred dollars a month into their parents'

          hands without tax consequences.  All that's needed is

          for the loan payments to exceed the rent received from

          the parents and the parents will come out cash ahead. 

          Since the children will be receiving depreciation and

          other deductions, their tax savings will enable them to

          afford the difference.  This arrangement could be

          subject to the limitation on "passive" losses, but it

          should be easy for your children to argue that they are

          actively managing the property and are entitled to the

          loss deductions.  At any rate, the tax losses probably

          will not exceed the $25,000 per year limit on passive

          losses.  Beginning in 1994 the rules on passive losses

          have become more liberal.

          

          18) Double dip with tax exempt bonds.  This is another

          way to use the $125,000 exemption or the provision

          allowing you to defer gain on the sale of a home by

          rolling it over into another home.  First you sell your

          home for cash and buy a new home.  But you aren't

          required to use the actual cash proceeds from your old

          home to buy the new home.  You can make a down payment

          with some of the cash and take out a standard mortgage

          for the rest of the purchase price.  The remainder of

          your cash can be used to buy tax-exempt bonds.  The

          bonds will pay you tax-exempt income that can be used

          to make the mortgage payments.  In addition, the

          interest on the mortgage payments will be deductible. 

          The IRS has ruled that this arrangement works.  (Letter

          Ruling 8530024)

          

          19) Help your child buy a home -- with the aid of the

          tax code.  Here are five ways to do it.  (1) Give your

          child the downpayment.  Make sure that the gift is less

          than the annual exclusion, so you won't owe any gift

          tax.  The exclusion is $10,000 per recipient per year,

          $20,000 if the gift is made jointly with your spouse. 

          If both you and the child are married, you and your

          spouse can give $20,000 to the child and $20,000 to the

          spouse for a total of $40,000 gift tax free.  (2) Lend

          your child money to "buy down" the mortgage interest

          rate.  By making an advance deposit with the lender,

          your child might qualify for, say, a 7% mortgage

          instead of an 11% rate.  This low starting interest

          rate will eventually rise, but you hope your child's

          income will also.  (3) Buy the home yourself and rent

          it to your child with an option to buy.  This entitles

          you to deduct cash expenses plus depreciation, provided

          you charge the child a fair market rent.  (4) Your

          child buys the home but borrows the downpayment from

          you.  On a loan of less than $10,000 you need not

          charge your child any interest, and on a loan of less

          than $100,000 you have to charge interest only if your

          child's net investment income exceeds $1,000.  (5) You

          can enter into an equity sharing arrangement with your

          child.  Each of you puts up part of the downpayment and

          you take title as co-owners.  You each pay a

          proportionate share of the mortgage installments and

          upkeep.  Your child must also pay rent to you for your

          share of the house, and you can deduct rental expenses

          for your share.  You also share in the profits if the

          home goes up in value.

          

          20) If you don't want to leave your home to your kids,

          a strategy you should not ignore is to give the home to

          charity.  You can take a deduction for this gift now,

          though you continue to live in the home until you die. 

          Here's how it works.  You give the charity what is

          known as a remainder interest in the home, and you keep

          a life estate.  The home is yours for as long as you

          live, but at your death the house becomes the charity's

          property.  You take a deduction now for the remainder

          given to the charity.  The size of the deduction is

          based on mortality tables issued by the IRS.  Since the

          deduction is for the value of the remainder interest,

          the older you are, the greater the deduction will be. 

          If you are 50, for example, you will be able to deduct

          about 15% of the home's fair market value.  At age 75,

          you can deduct about 47% of the value.  A tax advisor

          can consult the current IRS tables to determine the

          exact amount of what your deduction would be.

               You might want to use this strategy even if you

          have children to whom you would ordinarily leave the

          home.  The children might end up with more money

          overall if you take the charitable deduction now and

          use the tax savings to buy a single premium whole life

          insurance policy payable to the children.  The policy

          can be kept out of your estate, and thereby avoid

          estate taxes.  This approach makes sense when the value

          of the policy is expected to exceed the value of the

          estate.  Since SPWL policies earn market returns and

          homes in many areas are appreciating at very low rates,

          this could be a sensible strategy.

               The 1993 tax law made this strategy better.  In

          the past, there was a possibility that the alternative

          minimum tax could take away the tax benefits of this

          transaction.  But the new law eliminates charitable

          contributions of appreciated property from the

          alternative minimum tax.

          

          21) Become a landlord before selling and boost your

          cash flow.  This strategy is useful for homeowners in

          areas with soft or depressed housing markets.  If your

          home is difficult to sell at a decent price, rent the

          home out while continuing to seek a seller at your

          price.  This will give you cash flow to continue making

          payments on the house.  In the past it was assumed that

          if you took regular rental deductions such as

          depreciation, you would not be able to use the $125,000

          exclusion or deferral of gain if the home were

          eventually sold for a profit.  But a federal appeals

          court has ruled that you can get both tax breaks. 

          While renting the home you can depreciate it and get a

          year or two of tax sheltered income.  Then when the

          home is sold at a gain you can protect that gain.  If

          you plan to use the $125,000 exclusion you cannot rent

          the home for more than two years because the home must

          have been your principal residence for three of the

          five years prior to the sale.  In addition, the basis

          of the home for computing depreciation or capital

          losses is the lower of your regular basis and the fair

          market value on the date of conversion.  (Regs. Section

          1.167(g)þ1;1.1165þ9(b)).

          

          22) Your corporation can build you a house, on your

          land, then "give" it to you.  When you lease land to a

          tenant, any improvements the tenant makes (including

          the erection of a new building) become your property

          tax free when the lease is up.  This angle creates an

          interesting loophole whereby you can purchase raw land

          and lease it to your corporation.  The corporation then

          builds a house (the kind you happen to like) and rents

          it to you.  The corporation's lease payments to you for

          the use of the land are deductible to the corporation,

          and the company can also depreciate the house.  Your

          rental payments for the use of the house are income to

          the corporation.  When the land lease ends (say after

          20 years) the land and building are both yours.  You

          need not recognize any income as a result of the

          improvements the corporation made to your land, and

          your basis in the house will be zero (because you

          recognized no income).  If you sell the house, all the

          proceeds will be long term capital gain.  If you occupy

          the house as your residence, you can take advantage of

          the one-time $125,000 exclusion.  On the other hand, if

          you leave the property to your heirs, the basis to them

          will be the fair market value at the time of your

          death, and the capital gain will never be taxed.  Do

          not undertake the leasing arrangements we've described

          without expert tax and legal advice.