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Ways home sellers can limit taxes

Published Oct. 9, 2005

Question: We sold our home for $365,000. Since we bought it many years ago and raised our four children in it, our cost basis was only about $55,000. Our plan is to spend the summer traveling in our RV visiting our children and grandchildren.

But next winter we plan to settle down and perhaps buy a retirement condo or maybe a small cottage. We are not sure of the purchase price. In this situation is there any way we can avoid tax on our capital gain, which I figure is about $310,000?

Answer: Although you didn't say so, I'm going to presume you or your wife is 55 or older. I'm also going to assume you or your spouse owned and lived in your principal residence at least three of the five years before its sale. Finally, I'm going to presume neither of you has ever used the "over 55 rule" $125,000 home sale tax exemption before.

If you meet these three requirements, you qualify for the $125,000 once-per-lifetime home sale tax break. From your $365,000 adjusted (net) sales price, subtract the $125,000 exemption to arrive at your $240,000 "revised adjusted sales price." This is a very important number because your taxable home sale profit just dropped from $310,000 to $185,000.

However, you can completely eliminate any home sale tax by using, in addition to the "over 55 rule" $125,000 exemption, the "rollover residence replacement rule" of Internal Revenue Code 1034, which is available to home sellers of any age.

If you buy a replacement principal residence costing at least $240,000, you can defer tax on the remaining $185,000 of your sale profit. The replacement home must be bought and occupied within 24 months before or after the sale of your old principal residence.

Termite damage

Question: When we sold our home recently, the buyer insisted on a termite inspection report. The cost of repairing the termite damage was almost $8,500, which we had to pay. Can we deduct this amount on our income tax returns as a casualty loss?

Answer: No. The casualty loss income tax deduction is available only for "sudden, unexpected or unusual" expenses such as damages caused by fire, flood, hurricane, earthquakes and accidents. Several court decisions have ruled that termite damage occurs very slowly, usually over several years, so no casualty loss deduction is available.

Robert J. Bruss is a syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 64 E Concord St., Orlando, FL 32801. Questions of general interest will be answered in the column.