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Yours to keep

The law allowing tax-free gains on most home-sale profits entices some to sell, but many remain unaware that they can take the money and run.

June 22, 2003|Marnell Jameson | Special to The Times

Like many people, Augusta Solursh hasn't necessarily kept up on tax law.

So when the 86-year-old widow sold her Hancock Park condo in February, she got a tax-free bonus she didn't expect.

Solursh, who had owned her condo since 1983, sold to move to a rental in Park La Brea, an area convenient to shopping, friends and where, she said, "all the activity is in Los Angeles." Her motivation: "I moved because it was time to change."

The move proved a boon to her financial portfolio. Solursh sold her condo for $325,000, realizing a net profit of $180,000. Her entire gain was tax-free.

One of the best tax breaks around isn't supposed to be a secret, but many homeowners remain unaware of the windfall that could await them due to a law Congress passed in 1997.

"It's stunning how many potential sellers -- and even a few brokers -- don't know this law exists," said Bill Hoff, a Realtor with Coldwell Banker in South Laguna. The revised Internal Revenue Code states that if you have owned and lived in your primary residence for a total of two of the past five years, you qualify for up to $250,000 in tax-free profits. Couples can take as much as $500,000 in tax-free profits.

"There's nothing else like it from a tax-savings standpoint," said Mark Yegsigian, certified public accountant and owner of Mission Tax & Financial, in Laguna Hills. "If you qualify, jump on it like there's no tomorrow."

Before Congress revised IRC 121, the law required that sellers either buy a more expensive home or pay taxes on the difference. Selling a house to move into a rental often carried hefty tax consequences.

The former law made an exception for individuals older than 55, who could take a one-time, tax-free gain of $125,000 from the sale of a home. Now all sellers, regardless of age, can enjoy a tax-free windfall if they meet the requirements.

Under the old "over 55" law, Solursh would have had to pay taxes on any profit above $125,000. Instead, all the profit was tax-free.

She gave some money to her daughter to help her fix up her own home, then handed the rest over to her investment broker, who padded Solursh's retirement cushion by investing the remainder in tax-free bonds.

When her real estate broker, Sheila Dick, of Prudential/John Aaroe of Beverly Hills, told Solursh about her tax-free gains, Solursh said, "I thought, 'Well that was a lucky break,' and I never thought about it again."

While some sellers stumble onto the tax break by accident, others in the know are taking full advantage of it.

Beverly Hills broker Peter Maurice, of Coldwell Banker, who serves a largely affluent clientele, estimates that 75% of his customers are aware of the law. About 25% of his deals are driven by it. "While the tax-free gain may be a significant factor," he said, "it is not the most important factor."

But for Doug Painter of Los Angeles, the break was a key factor in his recent decision to sell. The 45-year-old attorney had owned a home in the Beverly Hills Post Office area since 1995, then sold in February. After closing costs, he netted around $300,000. Painter, who is single, estimated that on his income taxes he'll pay a capital gains tax on about $50,000, but $250,000 of the profit will be tax-free.

Painter put $160,000 down on a new, smaller home, which he just purchased for $800,000 in the Spalding Square area. The rest is in the bank.

"I got my equity out of jail and put it to better use," he said. "I certainly wouldn't have done the transaction if it weren't for the law."

A partner in the Glendale-based law firm DeWitt, Denney & Painter, Painter said having more cash in the bank will allow him to travel more and take on long-term contingency cases that he otherwise would have declined.

"Doug was a very astute seller," said Maurice, who handled the transaction. "He put all the important factors together before making his move."

Before sellers consider cashing out, however, they should have a clear idea of what they want to do next, experts advise. They must decide whether they are going to rent, buy down, buy up or move out of state.

Then they need to look down the road at the tax implications of that decision. For example, if they don't buy again, they should consider the impact of losing their mortgage interest deduction.

Sellers also should factor in the size of the gain, interest rates and moving and closing costs, which can take a sizable bite out of any profit.

Finally, they need to consider the cost of obtaining the new mortgage and the property taxes.

"Perhaps the biggest downside of this tax advantage is the nightmare of moving," said Ron Goldhammer, an agent with Prudential in Beverly Hills, who has taken advantage of this benefit twice himself. "It's a great tax break, but moving is incredibly strenuous. You have to ask if it's worth it."

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