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Will adding son to title increase exemption by $250,000?
Wednesday, November 16, 2005

By Robert J. Bruss
Inman News

DEAR BOB: If I add my 22-year-old son’s name on the deed to my home for a 50 percent share, can he and I each claim the $250,000 profit tax exemption for a total of $500,000, providing we both lived in the property for two out of the last five years before the sale? – Paul H.

DEAR PAUL: Yes. However, both you and your son must have owned and occupied the home as your primary residences for at least 24 of the 60 months before its sale. Then you each can qualify for up to $250,000 tax-free principal residence sale profits under Internal Revenue Code 121. For full details, please consult your tax adviser.

DEAR BOB: Is there a limit to the number of times I can purchase a home, live in it for two out of the five years before its sale, and claim the capital gains exclusion? – Cormac C.

DEAR CORMAC: There is no limit to the number of times you can use the Internal Revenue Code 121 principal residence sale exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return).

However, this great tax break cannot be used more frequently than once every 24 months. More details are available from your tax adviser.

CAN HOME CO-OWNER FORCE A SALE WITHOUT LAWSUIT?

DEAR BOB: My boyfriend and I bought a new home in March 2003. We hold the title as tenants-in-common. I am seriously considering dissolving the relationship, but I have concerns about getting my fair share so I can buy another home for my three children and myself. We agreed we each equally own 50 percent, with the exception of the $10,000 cash down payment he paid to buy the home. What happens if we split and he refuses to sell the home? Can he be forced to either refinance the mortgage in his name only, or pay me my share based on an appraisal? Would I be forced to bring a partition lawsuit? – Heidi P.

DEAR HEIDI: Unless you have a written partnership agreement with your boyfriend co-owner, you can’t force him to refinance or buy you out. Your only legal alternative is a partition lawsuit to force the sale of the property. However, if he wants to keep the house, when he realizes you are serious about bringing a partition lawsuit, he might decide it will be far easier and cheaper for him to refinance so he can buy out your 50 percent, minus $10,000, and say “good-bye” on a friendly basis. For full details, please consult a local real estate attorney.

The new Robert Bruss special report, “How to Earn Up to $250,000 (or more) Tax-Free Profits Every 24 Months Buying and Selling Houses,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center).

President Bush and Treasury Secretary John Snow have made it clear that tax reform will be at the top the economic-policy list come January’s State of the Union. Bush has said so in recent speeches, and Snow has followed up on cable television and in print interviews. Neither man, however, has endorsed the report of the president’s tax-reform commission, headed by former senators Connie Mack and John Breaux. In polite language, senior administration officials have expressed considerable unhappiness with the Mack-Breaux project, which lowers income-tax rates only a little and takes away popular tax deductions for home mortgages and state and local property taxes.

In short, the White House sees a bad trade-off, one that won’t pass the political smell test.

The truest test of good tax reform should not be its purity (such as a single-rate income or sales tax) or its absolute simplicity (though simplicity does matter). Rather, the biggest test should be the impact of tax-code changes on after-tax incentives to work and invest, incentives that will determine the course of future economic growth.

The tax-reform panel does make a number of pro-growth suggestions, such as full cash expensing for business investment and higher ceilings for savings-account participation. The panel also proposes territorial, rather than worldwide, corporate taxation, and would keep investment taxes on capital gains and dividends at a low 15 percent and in some cases drop them lower. These initiatives would all lower the cost of capital and boost economic growth.

However, the tax panel insists on abolishing the alternative minimum tax (AMT), which in the world of static scoring would dig a $1.3 trillion revenue hole. In effect, real income-tax reduction has fallen into that hole, where it may be stuck for a very long time.

One option of the panel’s tax plan would flip the top income-tax rate to 30 percent from 35 percent. That means individuals will keep 70 cents on the extra dollar earned rather than 65 cents, a tepid 7.7 percent increase in after-tax reward. Compare this to the Reagan tax reform of 1986, which took the top personal rate down to 28 percent from 70 percent. Back then, people hard at work suddenly kept 72 cents of each marginal dollar — a 44 percent incentive reward.

Of course, the Reagan reforms produced a quantum jump in economic growth while at the same time reducing inflation, in effect setting the American economy on a new course of prosperity which has spanned twenty-five years. In the post-WWII period, only the JFK tax cuts, which lowered the top personal rate from 91 to 70 percent, are comparable to the Reagan effort.

And that brings us to today’s dilemma. Precisely because Reagan’s reforms brought tax rates down so much in the 1980s, U.S. tax rates remain historically low. Hence, marginal gains from future tax reform will never be as great. But that doesn’t mean the Bush administration can’t do better than what the tax panel is proposing.

In putting together its ultimate reform proposal, the White House could leave the AMT in place, but index it to both inflation and wage gains. In this way the tax will not affect Red State middle-income taxpayers, and will simply impact the very top earners everywhere, including the Blue State rich folk. More, this adjustment will make room for deeper income-tax cuts, say to a top rate of 25 percent with perhaps one more bracket at 15 percent.

At a 25 percent top rate, successful earners would keep 75 cents on the extra dollar, a 15 percent improvement over their current plight. This rate would allow for simplification and reduced mortgage deductions, while keeping the state and local deduction in place.

Sources tell me that House Ways and Means chair Bill Thomas is looking at just this kind of trade-off. With this in place, key investment tax rates could be set at 15 percent for capital gains, dividends, and inheritance taxes. (It’s the after-tax yield on investment that provides the seed corn for job-creating new businesses.) The top corporate tax rate, now pegged at 30 percent by the tax panel, could also be brought down to 25 percent. And corporate capital-gains taxes could be eliminated, further reducing the multiple-taxation of capital.

A 10 percentage-point drop in tax rates for individuals and businesses would be a political eye opener and one worth fighting for. In effect, the purity test would fail, but the economic growth test would succeed. Three-quarters of a loaf of tax reform is better than no loaf at all if economic growth over the next twenty years increases as much as 5 to 7 percent. That’s real money, along with bucketfuls of new jobs and prosperity.