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Capital Bliss
However flawed the old home-sale tax exemption may have been, at least it was simple: roll over all gains until you got to age 55, then $125,000 per spouse was tax free, one time per lifetime. Now you can exempt $250,000 per spouse every two years, but the rollover shelter is gone: earn more than $250,000 on a property, and you must pay the IRS no matter what the price of the home you buy next.
The possibilities for multiple exemptions and multiplied taxes in the new law strike at the most vulnerable spot in American financial life.
Marriage.
Let's suppose you and your wife have plunked all your investment eggs in the real estate basket, lo these 25 years. You now have a home and five rentals, and good gains in value in all of them. The new tax law provides an opportunity: sell your home, exempt the gain, and then move into a rental for two years, shelter that gain, sell, and move againÉ.
The plan goes okay in the first move from College Hill to Shanahan Ridge. Spousal grumbling accompanies the next move to the rectangle in Martin Park, but "Gee, honey, look at all the money we're saving!" Later that year, you announce your plan for the next three moves, to the box fronting 30th street, the shack on Goss, and the one bedroom condo in Spanish Towers. What happens?
She leaves you, that's what. Which leads to another complication.
Under the new law, if you divorce, get the kids and the house, and two years later want to sell it, the schnook is gone and so is his $250,000 worth of exemption. Rollover won't protect you. Now there's a whole new discussion among divorce counsel: the opportunity for departing spouses to pre-pay the other's capital gain exposure.
Divorce is not the only way to lose a spouse ("Yes, my husband has been gone 20 years, now." That's too bad; how did he die? "Oh -- he didn't die; he's just gone."). If your spouse dies, to get the new exemption, you must sell the house in the year in which he died -- the last possible year for a joint tax return.
So, if he gets too excited at the New Year's party, and keels over clutching his chest, make sure the paramedics perform CPR at least past midnight.
Even if inconvenient timing prevents postmortem use of the new exemption, death does provide an authentic escape from capital gains taxes. When you die, all your assets "step up in basis" to current market value, and your heirs can sell the whole shebang without paying a dime in capital gains taxes (inheritance taxes are a different, more painful matter).
There is another way for a divorced, abandoned, or widowed spouse to get around the new rules.
Get another husband.
The law says that only one spouse needs to have lived in the home for two of the last five years in order to qualify for the exemption, and says nothing about how long you have to have been spouses. The Daily Camera will soon be filled with personals like this:
"DWF, 46, 5'7", 130lbs. attractive, athletic, needs husband. Smoking, drinking, football, drugs okay; free use of remote. Kid care, movies, yoga, health food, feelings not necessary. MUST sign pre-nup and post-closing divorce giving all rights to capital gain savings. Will pay $10,000 obo."
The temporary husband will be only one of many -- hundreds, maybe -- schemes to try to take advantage of the two year hold, and avoid the no-rollover trap. Let's see, now: how about if I deed this overpriced rat trap to my ungrateful kid for two years so he can sell it tax free. Meanwhile, I move back in with my exÉ.
As my accountant (Bob Elmore, one of the best) warned this week, the IRS takes a dim view of transactions "without economic merit." Keep those words in mind when you're thinking about getting creative with deeds or husbands.
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