Weak Housing Markets Hinder People On the Move
NEW YORK (AP) _ In these days of sluggish real estate markets, the always-dicey process of selling one home and buying another can be especially hard on one’s peace of mind.
Even under the best of circumstances this kind of deal takes fast footwork, a bit like trying to step from one moving boat to the other without falling into the water.
Now, thanks to gluts in many local markets around the country, it may be easier than ever to get stuck with two properties and two mortgage commitments -the new one you just acquired and the old one you can’t unload.
The risk is compounded by the tax laws, which let you defer capital gains tax on any profit from your old home only if you reinvest the money in your new place within a specified time.
The rule, as summed up by the accounting firm of Ernst & Young in the 1990 Arthur Young Tax Guide: ″You must buy, or build, and live in another house within two years before or two years after the date of sale of your old home to postpone the tax.″
As they are wont to do in such matters, the authorities have construed this language strictly, rejecting virtually all pleas for exceptions no matter how good the excuse.
Was construction of the new home unavoidably delayed by fire, bad weather, zoning dispute or other circumstance beyond your control? Sorry.
″What is more, the house must be substantially complete when you move in,″ points out the Personal Tax Adviser published by another big accounting firm, Price Waterhouse. ″You cannot pitch a tent on the foundation and claim you occupy your new home.″
In view of this, Price Waterhouse recommends, ″include a clause in your construction contract that calls for your contractor to pay any taxes you owe if construction is delayed beyond the 24-month limit.″
On the other hand, if the new house is bought and occupied but the old one won’t sell, it may be hard to find anybody to take the tax burden off your shoulders.
As Deloitte & Touche accountants put it in a current report on the subject: ″in a slow real estate market a timing problem may develop.″
One way to try to forestall this problem is to get a solid buyer signed up for the old home before you commit yourself to buy a new one, if it’s possible to manage the sequence that way.
If you can’t follow that script, the experts say you still may have a couple of fallback positions when an old home goes begging for buyers.
Maybe, suggests Deloitte & Touche, you can sell it to a friendly but separate entity such as an incorporated business you own or an employer that is transferring you.
″The sale must be bona fide and entered into on an arm’s-length basis,″ the firm cautions.
Alternatively, suppose you must rent your old house for a while until you sell it, in order to keep your cash flow from running dry. Have you converted the home into a rental property that isn’t eligible for tax deferral when you sell it?
No, you may still get the break, the experts say, as long as you meet the other requirements.
Says Price Waterhouse: ″The courts have ruled that temporarily renting out your old house because of a depressed real estate market will not prevent you from deferring your gain.″
End Adv PMs Thursday, Aug 2