QUESTION: Please straighten out the conflicting advice I am receiving from my real estate agent and my tax preparer. I am not yet 55 and will be moving from a high-cost to a lower-cost area. I have about $80,000 equity in my home, which I plan to sell in a few months.
After the sale, I expect to use this equity to buy a modest home for around $80,000 in Florida, which I will own free and clear. My real estate agent says I won't have to pay any tax since I am reinvesting my $80,000 equity. But my tax preparer says I will owe tax if I buy a less expensive home. Who is right?
ANSWER: Your tax preparer is right. Your real estate agent is wrong. This situation shows why real estate agents should not give tax advice unless they also are tax experts.
However, even many tax professionals don't understand the "roll-over residence replacement rule" of Internal Revenue Code 1034, so don't be too harsh on your well-meaning realty agent.
This tax rule says home sellers who, within 24 months before or after the sale, buy and occupy their replacement principal residence costing at least as much as the net (adjusted) sales price of their old principal residence must defer their profit tax.
If a less expensive replacement principal residence is purchased, the sale profit becomes taxable up to the difference in the two prices.
Please notice this rule says nothing about mortgages or equity. All that matters are the net adjusted sales price of the old home and the purchase price of the replacement home.
To illustrate, suppose you sell your old home for $150,000 net after paying the sales commission and other selling expenses. That means to defer the entire tax on your sales profit, whatever the profit might be, within 24 months before or after the sale you must buy and occupy a replacement home costing at least $150,000, including any capital improvements you add within the 24-month replacement period.
However, since you will be buying a less expensive replacement home for $80,000, up to $70,000 of sale profit in this example ($150,000 minus $80,000) will be taxable.
As you can see, the rule is actually quite simple: Buy a more expensive replacement home, defer your profit tax; buy a less expensive replacement home, pay tax. You must report your home sale on IRS form 2119 whether or not you qualify for tax deferral. Your tax adviser can give you further details.
Don't Try to Sell Home Without Agent
Q: We want to sell our home without a real estate agent, so we can save the sales commission. Please give us your checklist for selling our home alone.
A: There is only one item on my checklist for do-it-yourself home sellers. It says "Don't do it."
Selling a home today is a complicated business. Even the best professional real estate agents must work extremely hard to successfully complete every sale. As an amateur selling just one home you are at an extreme disadvantage competing against agents who belong to the local multiple listing service, which has hundreds of listings available to show to prospective buyers.
Frankly, I would love to encourage you to sell your home alone, so you can save the sales commission. But I would be doing you a disservice to recommend that you undertake such a task. The risks are too great for most home sellers.
For example, did you know that if you fail to disclose known defects in your home the buyer can sue you for damages? Do you know how to help the buyer obtain mortgage financing? Do you know how to arrange title insurance? Do you know how to have the sale successfully closed? These are just a few of the potential do-it-yourself home sale problems that can arise.
Although I am a licensed real estate broker, when I have a house to sell, unless I sell it to my tenant, I always list the property with a local realtor. Why? Because an owner cannot do an objective job of selling his own property without professional help.
Before you decide to sell your home alone interview at least three local realty agents who sell homes in your neighborhood. Ask them to give you their listing presentations. Inquire about their fees, services and anything else you want to know. Each agent should give you a written, competitive market analysis form showing recent sales prices and current asking prices of similar nearby homes, as well as the agent's recommended asking price for your home.
After each agent has departed, phone their client references of recent sellers to ask, "Were you in any way unhappy with the agent's service and would you list another property for sale with this agent again?" I think you will conclude you need a professional agent's help to sell your home.
Homeowner Can't Be Forced Into Selling
Q: Our real estate agent showed us a home listed in the multiple listing book. The price was reasonable and it said the seller would finance the sale with a 15% cash down payment. We made a full-price purchase offer with 15% down payment.