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I am selling my house – Do I have to pay taxes on the sales price?

July 12th, 2012 Comments off
Asked to comment on the new constitution and speculate on the permanency of the newly formed United States of America, Benjamin Franklin stated that “In this world, nothing can be said to be certain, except death and taxes.”  Some 200 years later the certainty of taxation continues.


One tax imposed in the United States is the Income Tax.  The Internal Revenue Code defines “gross income” as “all income from whatever source derived.” It is not limited to earned income and includes profits earned from the sale of real property.


A seller’s income derived from the sale of real property is calculated by taking the gross amount received by the seller (in cash, trade, barter or otherwise) and deducting therefrom the cost of the real property.  This cost of the real property in tax terms is referred to as the “cost basis” and generally consists of the purchase price and the cost of any major capital improvements put into the property during the period of ownership.  For example, if a homeowner were to purchase his home for $20,000.00 and, during the term of his ownership, added a $10,000.00 extension, the cost basis in the property would be $30,000.00.  If the same homeowner were to sell this property for $100,000.00, he would have a gain or gross income of $70,000.00.


Under Section 121 of the Internal Revenue Code, some of the gain from the sale of one’s principal residence is excluded from gross income. In order to be eligible for the exclusion, a tax payer must have owned the property and used it as a principal residence for periods aggregating two years or more in the five year period prior to the date of sale.


For a single tax payer, the first $250,000.00 of gain is excluded from gross income.  In the case of married tax payers who file a joint return during the taxable year in which the sale occurred, $500,000.00 of gain is excluded from gross income.


In order to be eligible for the $500,000.00 exclusion, it is not necessary that both spouses own the property.  It is only required that one of the spouses own the property, however, the occupancy requirements must be met by both spouses.  It is also not necessary that both spouses be alive at the time of the sale, as there is a special rule for certain sales by surviving spouses. A surviving spouse will receive a $500,000.00 exclusion provided the sale occurs within two years of their spouses’ date of death and, provided that at the time of the spouses death, the parties would have been entitled to the $500,000.00 exclusion.


In general, the exclusion may only be used once every two years, but there are also exceptions to this rule if a sale is necessary “by reason of a change in place of employment, health or, to the extent provided in the regulations, unforeseen circumstances.”


Suppose you don’t have a house, but live in and own a Coop Apartment? The same rules apply. In the case of a cooperative, the ownership requirements apply to the titled holding of the stock and the use requirements apply to the occupancy of the apartment which the tax payer was entitled to occupy as a shareholder and owner of a proprietary lease.


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Encroachment…Defense…5 Yard Penalty!

October 2nd, 2011 Comments off

In the 3rd Millennium, prehistoric man picked up his hunting and gathering tools and moved to Mesopotamia to live with his fellow former cavemen. Thus, began civilization. The dawn of the next day witnessed the first dispute between adjacent landowners. It probably started over something minor. Perhaps Uruku’s camel too frequently fertilized Ebarbar’s front lawn. An argument ensued over picayune matters and quickly escalated to a full-blown feud until Ebarbar finally settled the matter by burying the hatchet . . . in Uruku’s skull.

After Hammurabi codified the laws, the hatchet solution became passé. So was spawned the first lawyer. Five thousand years later people still fight with their neighbors and lawyers are still busy.

Not-so-neighborly disputes arise over boundary lines, shared driveways, noise complaints and innumerable other actual or perceived injuries. To solve these problems, I advise my clients of their five options:

You can sue the bastards, but civil litigation is costly.

You can do like Ebarbar did, but criminal defense attorneys are also expensive and felony murder can get you a long prison term.

You can try to work it out.

You can ignore it.

You can move.

If the offense is minor, I always advise the client to choose option three and fallback on option four. No matter how many times your neighbor puts his trash cans on your side of the driveway, it’s not worth it to sue him. If you do, it will cost you money, time and aggravation. And it won’t solve the problem. You’ll find yourself mired in the quagmire of trench warfare which will make you paranoid and anxious. You’ll never again feel that you are at “home sweet home.”

Some offenses cannot be ignored or excused. If your neighbor paves over your lawn to make a larger driveway for his boat and RV, his encroachment impairs the value of your land and clouds your title – perhaps making it unmarketable. What can you do in such a case?

First, you should research the title to your property to see who owns the land in question. Check for easements, which are recorded agreements permitting adjacent property owners to use or cross your land. It may be that a prior owner gave your neighbor the right to place his driveway next to your geraniums.

It is essential to know your property line. Where does your land end and his begin? Only a licensed land surveyor can make that determination. It’s expensive to obtain a new survey. But if your surveyor can locate an existing survey, he can compare it with the “meets and bounds” description in your deed. He will measure your property by reference to fixed points such as intersections. The surveyor researches available property records and compares adjoining properties. He then measures distances with references to compass points to identify your property lines. Ask the surveyor to “stake the property” so that you can see for yourself and show your neighbor.

If your inspection reveals that your neighbor’s driveway is less that one foot inside your property line, a title company will insure the property as such deviations are minor. However, if own a small lot, a one foot encroachment can be significant regardless that your ownership is insured. Then, it’s your call whether to make an issue of it.

If the surveyor confirms that your neighbor’s driveway extends more than one foot onto your land you must take action to remedy the problem and reclaim the land. Even if you don’t mind the intrusion, it may prevent you from selling the house if your buyer can’t get title insurance or his mortgage lender determines that the value of the “lost” property severely impairs their investment. In the worst case scenario, an obvious, obtrusive and offensive use of your land for more than ten years will allow your neighbor to take the property by “adverse possession.”

What then can you do? Machiavelli once said, “There is no avoiding war; it can only be postponed to the advantage of others.” But he didn’t have to pay a lawyer or live next door to his mortal enemy. Decide if the encroachment really bothers you or significantly impairs your use of the property. If not, one solution is to negotiate and sign a Boundary Line Agreement, by which you may permit your neighbor to use the land with the understanding that he doesn’t own it. It’s a good compromise. He keeps his driveway and avoids the cost and inconvenience of relocating it. You keep good title to the property and avoid the cost of litigation. You both avoid conflict which is essential to your sanity and peace of mind. Remember. You live here. This is “home” where you should be safe and happy.

The Boundary Line Agreement can be drafted so that it will expire upon a future event, such as when your neighbor sells the property or needs to repave the driveway. That provides a permanent but bloodless solution.

If you’ve tried unsuccessfully to resolve the problem amicably, it will be easier to justify spending the time and money to sue him.

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The Real World – Property 102

April 30th, 2011 7 comments

“If you want it, here it is, come and get it, but you better worry ’cause it’s costs some cash.”

I was a first year law student attending my first day of class at the College of William and Mary and espoused with a thirst to for knowledge – to learn “the law.” Socrates would have been proud.

The course was titled, Property 101. Professor Pompous stood before the class. “Who among you,” he queried, “believes that possession is 9/10th of the law?” I raised my hand. So did many of my classmates; the rest wondering if it was a trick question. “Put down your hands,” he said with a smile. “By the end of the year you will learn that ‘possession’ is meaningless. The rule of law prevails.”

And so we journeyed through the course – from real property to personal property:

  • Leasehold rights passed from lords to knights.
  • Title chains lost and gained.
  • Adverse possession? An ownership obsession.
  • Riparian rights about the water? Does it matter – cash or barter.
  • Who owns the air? Sometimes its shared.
  • The statute of frauds; decisions narrow and broad.
  • Equitable conversion and ownership reversion.
  • Inter vivos gifts and partnership rifts.

He went on and on.   

By May, I was convinced. Later, imbued with confidence and my knowledge of “the law”, I emerged from the ivory tower of learning, passed the bar exam and began to practice law. It took about a month to learn that everything Professor Pompous taught me was a fairy tale. If John’s tool shed is on Jane’s land, she needs to pay a lawyer to sue him to have her day in court. That takes time and money. If she wins, he can appeal. If he loses the appeal and he still doesn’t remove the shed, she’s got to sue to enforce the judgment. If she doesn’t have the patience or the money, she loses.

My world was shattered. It was like learning that there was no Santa Clause, that the Easter Bunny didn’t eat the carrot I had left the night before.

I looked it up. When Professor Pompous graduated from law school, he worked for a “white shoe” corporate law firm long enough to have a cup of coffee. Then he decided to teach. He didn’t know jack.

In the real world, possession may not be 9/10 th of the law, but it’s better than half.

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