Tax bite from selling moms house?

Defer capital gains hit with 1031 exchange

Benny Kass
Inman News

DEAR BENNY: After my father-in-law passed away, my husband's mother moved to be near us and bought a home, eventually putting it in my husband's name. She passed away four years ago and my husband has not sold the home. We are a few years away from retirement. Would it be better to wait until his income is lower to sell or sell now? We really don't know what to do and I think my husband worries about the big tax bill he will get. --Irene

DEAR IRENE: I suggest you discuss the tax situation with your financial advisors. I cannot advise you or even speculate on what your tax bill might be if and when you sell the property. You have to determine what the tax basis of the property was on the date your mother-in-law died, and (depending on what state you live in) you may be eligible for what is known as the "stepped-up" basis -- i.e., the value of the property on the date of death. (Note: For 2010 only, this concept is not applicable unless Congress changes its mind.)

But if you are nearing retirement, and plan to move to another area, have you considered a Starker (section 1031 exchange)? The house in question is not your principal residence and thus would be considered investment property.

Let's say you want to move to Florida two years from now. You sell the house, and exchange it for a rental property in Florida. After renting it out for a year or two, you move into it and declare it your principal residence. The tax basis of the new property will be the basis of the exchanged property, but you will not have to pay any tax now if you follow the procedures of such an exchange.

You will need professional guidance to do it right.

Also make sure that the house is in the name of your husband only. If it's not, you may have to probate your mother-in-law's estate so that the property will go into his name.

DEAR BENNY: I am an 81-year-old widow who bought a townhouse four years ago. There were some odd things going on here so I installed a security system. I have been told that the security sign I have in front of the townhouse is considered advertising and I have to take it down. There are three other areas in town that have townhouses and none of them have a problem with this. What happens if I refuse to take the sign down? --Lillian

DEAR LILLIAN: Different associations have different rules and regulations, and all homeowners are legally obligated to follow those rules. If your association does not permit signs to be posted outside your home and you refuse to remove your sign, the board of directors could fine you and/or ask a court to require you to honor and follow those rules.

That's a general answer as to the things that association boards of directors can do if a unit owner fails to comply with the rules. However, in your case, you should meet personally and talk with the president of the association. Explain your situation and ask for a waiver of the rules. Point out that your sign really is not advertising.


If the board refuses, I suggest that you contact an attorney to assist you. I am sure you can find a lawyer who will take your case on a no-fee basis called "pro bono." Also, AARP may be able to assist you.

However, let me ask this question. While I understand that you want the outside world to know that you have a security system in your house, do you really need that outside sign? Isn't it sufficient that you have the actual system installed in your house? Perhaps you and the board can reach some kind of compromise -- such as having a sign in your window so that outsiders will be on notice of that system.

DEAR BENNY: Could you please give me the IRS citation number of the repeat credit. I cannot find it on the IRS Web site. --Richard

DEAR RICHARD: I received a number of questions about the "repeat credit," but did not know what they were asking about. I e-mailed one of my readers, who explained this was the new law that allows present homeowners -- under certain conditions -- to claim a tax credit previously available only to first-time homebuyers.

You can get information on both credits on the IRS Web site (www.IRS.gov) here, or by typing in "first-time homebuyer credit" in the search box in the upper right corner of the home page.

Last November, Congress enacted the Worker, Homeownership and Business Assistance Act of 2009. It extended the time that first-time homebuyers could get an existing tax credit of up to $8,000 beyond the previous Nov. 30, 2009, deadline. Now, in order to be eligible for the credit, you must have a binding sales contract signed by April 30, 2010, and must actually go to closing (also called "escrow") before July 1, 2010.

There are a number of restrictions, including income limitations, and you should consult with your own tax advisors to make sure that you are eligible.

In extending the first-time homebuyer tax credit, Congress also allowed some existing homeowners to claim a smaller credit, which some of you have labeled as a repeat credit. If you currently own a home that you have used as your principal residence for any consecutive five-year period during the eight-year period that ended on the date that the replacement home is purchased, you may be eligible for a $6,500 credit. Once again, your sales contract must be signed by April 30 and in settlement before July 1, 2010.

DEAR BENNY: You recently wrote about how "limited common elements" can include a person's patio. I haven't heard the term "limited" before relative to common elements. In the case you cited, I understand you to mean that the condominium association has the right to have its architectural review committee set some standards for limited common elements, such as patios. I presume this also pertains to wooden decks and balconies that are accessible only from the inside of the unit. If so, does this mean that the association is liable for the repair of cracked decks or deteriorating external rear wooden decks/balconies as they would be if these were deemed to be common elements? --Lew


DEAR LEW: Every condominium contains three basic elements: the common elements (such as the roof, elevator or main entrance); units (the place in which owners physically reside, usually described as wall-to-wall and ceiling-to-floor); and limited common elements. The latter is a common element but is not accessible to every unit owner. Typically, a limited common element (LCE) is a patio, a deck and even a mailbox. Some parking spots are also LCEs although they could also be a separate unit or merely a space in a general common element.

Why are they called limited common elements? Because they are not within the physical unit itself.

Most legal documents in a condominium association (usually the bylaws) give guidance as to who is responsible for the maintenance and repair of units and common elements. And from my experience, the association is usually responsible for the LCEs.

This makes sense. The condo board (and indeed a majority of unit owners) wants some kind of uniformity in their community. They do not want unit owners placing gas grills, for example, on their balconies, or anything else that may become a health hazard. Recently, I represented a condominium association that had to take a unit owner to court because she had a hot tub on her balcony.

But there is a more basic reason why the association must have the authority to control these LCEs. If, for example, a unit owner has a defective balcony and decided not to repair it, it could collapse and cause damage to someone walking down the street.

So, yes, the association could be legally responsible for any damage or injury to property and person caused by a limited common element.

However, that does not mean that the owner who has exclusive access to the limited common element is always off the hook for the costs involved in repairing those areas. Clearly, it would be unfair if the owners who do not have balconies have to pay for those repairs. Accordingly, some association documents -- while reserving the repair and maintenance responsibility to the association -- have the payment assigned to those who have such LCEs.

Read your own legal documents and talk with the association's legal counsel.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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Copyright 2010 Benny L. Kass

Author: Benny Kas