Q: I am a joint-tenant owner of my house with another man, who is 55 years old. May we sell the house and let him claim his $125,000 exemption on the profits, allowing me to save my $125,000 exemption until I turn age 55?
A: As unmarried joint tenants in a principal residence, you each qualify for a $125,000 exemption on the profits from your home sale. But to exercise this exemption, you must be at least 55 and have lived in the house for three of the last five years.
You may not use your exemption until you turn 55, regardless of what your housemate does. If he chooses to use his exemption when you sell your current home, he may apply his exemption only to his share, or 50 percent, of the profits. If your total profits exceed $250,000, he could expend his entire exemption. If the profits are less than that amount, he can still apply his exemption to them. But any unused portion is lost forever. You would be required either to pay taxes on your half of the profits or roll them over into the purchase of a new home.
Without knowing the profits you expect to realize on the sale and whether your housemate intends to buy another principal residence, it is difficult to offer advice. But if your profits are considerably less than $250,000 and he expects to buy another home that could appreciate in value over the years, he might consider waiting to use his exemption at a later date. In this case, by waiting, he might be able to make fuller use of the exemption.
Q: My son may soon be moving to another city for a new job. However, if he sells his house here now, he stands to lose money because of declining real estate values in Southern California. Could he convert his home into a rental and then be eligible to declare a capital-loss deduction on any loss he suffers upon its sale? Also, how long would the home have to be a rentalbefore it would officially qualify as an investment property?
A: Yes, your son can convert his home into a rental, but it may not produce the desired tax-deductible loss upon the property's sale. Why? Because the tax basis of the converted property is set as of the date of the conversion or its purchase -- whichever is lower. So, if your son's property has already declined in value, that would have to be recognized in an appraisal conducted when he converts it. Any decline suffered be fore the conversion could not be written off as an investment loss.
But if you have reason to believe that your son's property will continue to decline, or if he just bought it and can use his original sales price as his cost basis, or if he can secure a favorable appraisal, then converting it to a rental might make sense. If he does this, then the longer he holds it as a rental before selling it and taking his investment loss, the better. Our experts recommend at least six months to a year.