Archive for Friday, May 11, 2007

Paper profit on home not taxed

May 11, 2007


Q: We purchased our home five years ago, and now it's worth about $100,000 more than we paid for it. My employer transferred me to another city two months ago, but my wife and I decided to rent our old home out to tenants instead of selling it because the local housing market in our old hometown is still a little soft. Do we now owe taxes on our $100,000 "paper profit" because our longtime home has been converted to a "rental property"?

A: No, you don't owe any income taxes on your old home's higher value. That's because you haven't sold it yet.

Although you will have to declare all the rental income you receive from the tenants on your next tax return, most or all of the taxes owed will probably be offset by all the extra write-offs you can now claim as a landlord. For example, in addition to the deductions for mortgage-interest charges and property taxes that all real estate owners can take, you'll also be able to deduct the cost of insurance and repairs on your old home, dues you might pay to a local homeowners association and most expenses (credit checks, management fees, etc.) needed to select a tenant and collect the rent.

As a landlord, you will also be eligible for valuable "depreciation" deductions that essentially allow you to take write-offs as if the property is losing value, even though it will probably continue rising before you sell it. Talk to an accountant for details about how you can maximize your tax deductions now and also minimize them when you sell.

Q: We hired a real estate agent from a large office to sell our home in early January, and he found a buyer for us about six weeks later. But ever since we signed the buyer's offer, our agent has basically ignored us. He hasn't returned our repeated calls when minor problems have since come up, and the buyer's agent (not ours) now is steering the whole deal through closing. We feel that our agent simply has abandoned us. Do we still owe him the 6 percent commission that we originally agreed to pay? Can we at least force him to cut the commission or take him to small-claims court because although he found a buyer for us, he hasn't done anything since?

A: Most good real estate agents are quick to point out that finding a buyer for a client's property is only part of their job. Shepherding the deal through the complicated closing process is equally important, especially now that many buyers who sign a contract suddenly might decide that they want to cancel the sale after reading a newspaper article or seeing a TV report that suggests the housing market could get worse before it gets better.

Call your agent one last time to explain your frustration and concerns. If you can't talk to him immediately, leave a message to tell him that you'll be calling the owner or manager of his office the next day to complain. The owner or manager certainly has the power to make your agent start paying attention to you again, or even can assign one of the company's other agents to help oversee the deal (at no extra cost to you) if your original salesman refuses to get back to work on your transaction.

Following such advice should solve your problem. But alas, if it doesn't, you probably don't have the right to deny or reduce the slacking agent's commission. That's because nearly all listing contracts guarantee that the agent must be paid the agreed-upon fee if he or she procures a "ready, willing and able buyer."

Your agent apparently has fulfilled that requirement, and that's all he would have to prove in court if the sale is completed but you then ask a judge to nullify or alter the listing agreement you originally signed.

Q: My eldest sister recently died. Her will states that her home and other assets are to be split evenly between me and my brother. How do we get our deceased sister's name off the title to her longtime home and have the title transferred over to our own names?

A: Unfortunately, because your late sister had only a will but no living trust, her home and virtually everything else she owns will probably now have to go through the costly and time-consuming probate process.

Depending on how complicated your sister's estate is, it will likely take the probate court at least six months - perhaps even a few years - to verify the authenticity of the will, inventory and appraise your late sister's assets and make sure that any of her creditors are paid before the remainder of the estate can be distributed to you and your brother. Contact a probate attorney in the county where your sister lived for help.

The extra time and expense of going through probate could have been avoided if your sister had instead placed her assets in a basic living trust. A home and other assets that are held in a trust are not subject to probate hearings, which helps to ensure that the property can quickly be passed to the deceased's heirs at minimal cost.


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