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.