Life estates and homestead exemption

Q. Will I lose my homestead exemption if I set up a life estate deed for my property?

A. No. As long as you retain the right to live on the property for your lifetime, you will not lose your homestead exemption. You can find this in     Florida Statutes 196.041 (2).

However, I do not recommend the use of life estates. It really is simplest if you keep title in your own name.

Homes at Risk: Is yours one of them?

The Times' Sunday and Monday business sections feature a two-part report on foreclosures and the risks posed by adjustable rate mortgages. You'll be hearing more about adjustables, particularly the controversial option ARMs, which start out with minimum payments that don't even cover all the interest accruing. They made it possible for many people to buy homes they otherwise couldn't afford, but now they're adjusting upward and some borrowers can't afford the payments.

We'd like to hear about your experiences with adjustables and your opinions about our stories. Please post them as comments here.

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Leaving your home to your heirs

Q. Within the past year or so you did a column on the little used conveyance of a home or real property using either POD or ITF.  I can’t find the article in my files.  I’ve tried to access the article by going to the St. Pete Times website and I pull up other articles by you but not this one.

A. You are remembering a column that I wrote about "Lady Bird deeds." This type of deed conveys the property to another person, but retains use of the property for life and most important, retains the right to revoke the deed. It is a version of the "payable on death" account and it is better than a traditional life estate. However, I do not recommend it. My recommendation is to leave the deed in your own name. Here's the article.

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How can I keep a duplex and buy a new home?

Q. I purchased a duplex from my father-in- law 2 years ago. I have been living in one side and renting the other since taking ownership and my father-in-law holds the
18-year-mortgage. I would like to keep this property and move out to rent it completely and buy a new home. I do not have any money to put down on a new home. My questions are what are my options as far as home equity, extending my mortgage and the possible taxes that I would incur and/or pitfalls?

A. In my opinion, your best bet is to raise the money for a 20 percent downpayment on your new home plus some extra cash as an emergency cushion by borrowing money against your duplex either as a total refinancing (paying off your father-in-law) or as a second mortgage. Once you know the cost of those options and the size of your future payments, consider whether it is reasonable to assume you'll be able to keep both sides of the duplex rented at a high enough rate to cover your mortgage(s), insurance, taxes and repairs. If not, I doubt that you can afford to own both a duplex and another home.

If the plan above proves financially feasible, then having a rental property could work out well for you. However, keep in mind that by moving out, you will be giving up two big tax breaks on the property. Since you have owned and lived in the property for at least two of the last five years, the capital gain on the part you've lived in would be tax free, assuming it's less than $500,000. The gain on the part that's rented is taxable. You could even convert the entire property to your residence and make the entire gain tax-free, except for recovery depreciation deductions. Also, by moving out, you lose the Save Our Homes cap on real estate taxes for the part that you live in.

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Will my son owe capital gains taxes?

Q. My son recently sold the condo he owned and lived in for over 2 years, making a profit of about $130,000. His fiancé also had a condo, sold it, and made similar profit. Now they are in the process of buying a $382,000 house together ( wedding will take place next year ), and are planning to put down $160,000. Would they have to pay any capital gains taxes, or any other taxes on this money and how much?

A. Did his fiance also own and live in her house for at least two years? If so, neither of them owes any tax. So long each of them has a profit of less than $250,000, they're home free.

Selling the family house

Q. My mom wants to sell the family house. According to the recent sales in her area, there will be an estimated capital gain of $500,000-$550,000. The property's title is held by my mom and me as joint tenant. Will we qualify for the $500,000 tax-free principal residence sale exemption if we both lived in it the past two years? Since we file separate tax returns, how do we report the sale?

A. If your name has been on the title for the last two years and you lived there during that time, then you qualify for a $250,000 exemption and so does your mom.

Remember in calculating the profit that it's not just the difference between the sale price and her original purchase price. To the original cost you can add remodeling costs, real estate commissions and fix-up expenses prior to the sale.

Here is how this was handled on 2005 returns: If the profit on the house was less than the exclusion, you didn't have to report the sale on your return. If it was more than that, you reported your half of the profit on Schedule D and on a separate line you subtracted the exclusion as though it were a loss, labeling it "Section 121 exclusion." The process should be similar for 2006 returns unless the IRS decides to create a special form for this.