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Minimizing a Retiree's Home-Sale Tax

October 01, 1987|DON G. CAMPBELL | Times Staff Writer

Question: Like a lot of older Californians, my wife and I have seen the value of our house rise dramatically in the past 13 years. We bought it for $90,000, and it is now appraised at $250,000.

Because we are both 62 and about to go into retirement, we want to either sell the house and buy a smaller retirement home or simply go into a rental. This makes us eligible for the over-55, one-time exclusion of $125,000 in profit, but, of course, that's still going to cost us a lot in taxes unless there's some other way out of it.

Even if we do decide to buy a replacement retirement home, we certainly don't want to spend any $250,000 on it just to defer the tax.--L.L.

Answer: The $125,000 exclusion of profit in the sale of a home that you have occupied as your principal residence for three of the last five years (and if one of you is at least 55 years old) is heaven-sent, all right, but it's true that it doesn't necessarily bail everyone out.

If you choose not to take the exclusion (but why wouldn't you?), then you've got a real problem in trading down, because the entire difference between the $250,000 selling price of your present home and the price of any replacement home (let's say, for example, $100,000) is fully taxable. And that's a fat $150,000 of taxable income. And while, under the old tax law, this was treated as a capital gain and had a 20% cap on it, the new tax law treats it as ordinary income--which means the top rate of 28% or, in some cases, even more.

However, according to Rob Giannangeli, the Internal Revenue Service's public-affairs spokesman, there is a way to cut down your tax bite if you elect not to buy a replacement home. And, he said, you can eliminate it entirely if you do buy a replacement home--but a cheaper one than you are now occupying. What's involved in both instances is a combination of the over-55 rule with the roll-over residence-replacement rule.

The the roll-over-replacement rule is the one most familiar to the average home buyer: No matter how much appreciation your house has had, the tax on profit is deferred when you sell it as long as your replacement house costs at least as much as your selling price. A lot of us have benefited from this several times in our lives.

So, how does the combination of the two rules work? First you start with the selling price of your current home, $250,000, and subtract from that your selling expenses--let's say $15,500, which would include the broker's fee and fix-up expenses. Now, Giannangeli said, from this balance of $234,500 you subtract the basis price of your home, $90,000, which gives you a gain of $144,500. And, from this, Giannangeli said, you take the over-55 exemption of $125,000, which gives you a recognized gain of $19,500. This is the amount on which you would pay taxes if you decide not to buy a replacement home.

If you do decide to buy one, however, it's computed a little differently. From your selling price of $250,000, you again subtract your selling expenses of $15,500, which gives you, again, $234,500. You now take your $125,000 exclusion, Giannangeli said, which gives you the revised adjusted sales price of $109,500. And if you do decide to buy a retirement replacement home (you've got up to two years to act), you'll have the tax on it deferred as long as the replacement home costs at least $109,500.

It's a little complicated and you may want your accountant or tax attorney to walk you through it, but the dollar savings make it well worthwhile.

Q: I don't know whether this is a legitimate complaint, but it seems to me that a piece of Ventura luggage that I received for Christmas some time ago should have held up better than it has. I noticed, when I took it down for a weekend trip recently, that the stitching had ripped out in about four or five places.

I don't know what you call this style of bag, but it fits under an airline seat, has rigid sides and the top is flexible tan vinyl. I would guess that I received this about three Christmases ago, but I've probably not used it more than three or four times a year since then.

My husband bought it for me at H. Savinar Luggage in Los Angeles, which I know is a well-regarded dealership, so I'm not blaming them for this. Should I blame Ventura, or is this a reasonable life expectancy for a bag like this?--M.F.

A: It would be a little difficult, without examining the bag--which Bob Savinar of Savinar Luggage has volunteered to do for you--to know whether the stitch breakage is a matter of normal wear and tear or something was wrong with it originally.

Because there's a bit of guesswork on your part in the first place about how old the bag really is, Savinar has a sneaking suspicion that it may be at least a couple of years older than you remember. "It sounds like a line that Ventura hasn't made for about five years," he said.

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