Who Has Legal Property Rights?

Q: DEAR BOB: My son married and bought a home in 2001, but the house is titled under the name of his wife's daughter. The reason was my daughter-in-law owed the Internal Revenue Service a large amount of money. My son has paid all the expenses, such as mortgage payments, property taxes and maintenance. His wife recently died of cancer. What are my son's rights to this property? -- Celia C.

A DEAR CELIA: Your son should consult a local real estate lawyer. I presume the daughter is at least 18. The simple solution is for her to sign a quitclaim deed to your son. If she refuses to do so, it may be necessary for your son to bring a title lawsuit against the daughter. That could involve the IRS in the dispute, however, depending on the facts.

This situation shows the high risk your son created by not insisting his name be on the home's title at the time of purchase. Unfortunately, although your son has paid all the expenses, the court might determine he has no right to ownership.

DEAR BOB: Three years ago, I married and I added my wife's name to the title to my home. I have owned the house since 1981 and it has greatly appreciated in market value. We sold it in October 2005. I presumed that by adding my wife's name to the title I would get a new stepped-up basis to market value. However, when we recently had our 2005 income taxes prepared, we learned adding my wife's name to the title did not step up the home's basis. Although we were entitled to the $500,000 principal residence sale tax exemption, the net profit was about $610,000, so we owed capital gain tax on $110,000. Is this correct? -- Brett W.

DEAR BRETT: Yes. Stepped-up basis applies only when there is a death and you inherit property. Adding your wife's name to your home title did not create a new stepped-up basis for the home.

DEAR BOB: I have owned a condo at the beach that I rent to tenants for the past eight years. The rent income and expenses are reported on Schedule E of my tax returns, and that is where my accountant deducts depreciation. If I sell the condo, how does depreciation catch up with me? Or, if I make a tax-deferred exchange, what happens to the depreciation deducted on my tax returns? -- Janet J.

DEAR JANET: Depreciation is a non-cash tax deduction for estimated wear, tear and obsolescence of business and investment property. Residential rental property must be depreciated over a 27 1/2 -year estimated useful life. Land value is not depreciable because land never wears out.

After you sell a rental property on which you have been deducting depreciation, the total depreciation you deducted is "recaptured," or taxed, at a special federal tax rate of 25 percent. State income tax may also apply. However, if you instead make an Internal Revenue Code 1031 tax-deferred exchange for another business or investment property of equal or greater cost and equity, you avoid paying tax on both the deducted depreciation and the rest of your capital gain. Consult a tax adviser for details.

DEAR BOB: Thank you for your article last year explaining that the sale of a vacant lot adjoining a principal residence can qualify for that Internal Revenue Code 121 tax exemption of $250,000 for a single or up to $500,000 for a married couple filing jointly. When we had our income taxes prepared, I showed that article to our tax preparer, who was not aware of that tax break. He verified it with the IRS. As a result, we avoided paying capital gains tax of about $8,000 on the sale of a lot adjoining our home. Many thanks. -- John S.

DEAR JOHN: Be aware that Internal Revenue Code 121 allows the tax exemption on the sale of a vacant lot adjoining your principal residence only if you sell your home within two years before or after the sale of the lot. If you haven't already sold your home, it must be sold within 24 months after the lot sale, otherwise you will owe that $8,000 tax, plus interest, from the lot sale.

DEAR BOB: My home is worth more than $700,000, many people tell me. The similar home across the street was recently refinanced and appraised at $769,000. But the real estate agent who expects to get my listing says my house is only worth only about $700,000. How do I get a reasonable appraisal of my home? -- Mavis B.

DEAR MAVIS: Your situation is a classic example of why home sellers should always interview at least three successful local real estate sales agents. The agent you consulted should have prepared for you a written comparative market analysis. This shows the agent's estimate of your home's market value based on recent sales prices of similar nearby homes, asking prices of neighborhood homes currently listed for sale and asking prices of recently expired comparable home listings. Only after you have compared analyses from at least three successful agents who sell homes in your vicinity can you decide, with the advice of your listing agent, the correct asking price for your home.