Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 28, 1994 TAG: 9403030012
SECTION: BUSINESS PAGE: A6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
\ Q: In 1973, I purchased a house with my wife for $23,500. In 1979, we were divorced. The house was never sold and is still jointly owned. I am 55 and would like to know when would be the best time to sell or force sale of the property. What are my tax alternatives?
The house is now worth more than $100,000. No improvements of any consequence have been made. About $11,000 is owed on it, and my ex-wife makes the mortgage payments. I have not purchased a house since my divorce.
A: A subsequent conversation with the questioner revealed:
He has not recently lived in the house.
His ex-wife is not yet 55.
There was no specific property settlement regarding the house at the time of divorce.
His ex-wife began making the mortgage payments fairly recently. Equal ownership of the house is therefore assumed.
Based on all this information, a sale of the house would have the following tax consequences:
For the husband, his share of the gain - the sale price, less selling expenses, less original cost, divided in half - would be treated as a long-term capital gain, fully taxable up to a maximum federal rate of 28 percent. Because he has not been using the house as his principal residence, he does not qualify for either postponement of gain or the once-in-a-lifetime exclusion of gain.
His ex-wife, however, has been using the house as her principal residence and could qualify for postponement of gain. To do so, she must purchase or build a new principal residence within the period beginning two years before and ending two years after the sale of the old residence. Her share of the gain would be recognized only to the extent that her share (50 percent) of the ``adjusted sales price'' - the sale price, less selling expenses, less qualified fix-up expenses - of the old residence exceeds the cost of her new residence. If the cost of her new residence is as much or more than her share of the adjusted sales price of the old residence, all of the gain would be postponed.
She could not qualify for the once-in-a-lifetime exclusion since she is not age 55 or older.
\ Answered by James B. Taney of Anderson & Reed.
\ Q: My father died in 1945, leaving a family farm to my mother and their four children in joint ownership. As each heir died, his share was to be passed to the surviving heirs equally. After his death, the farm remained largely uncultivated and grew up in trees. The timber was sold in 1992; the buyer paid half the sale price in January 1993, and half in January 1994.
My first question is: Can this sale price be treated as capital gains, using the value of the timber at the time of inheritance as the cost basis?
Three of the five heirs were deceased at the time of the sale, dying in 1961, 1969 and 1971. A forester with the buying corporation, using the sale price as a basis and a standard formula for similar questions, has estimated the trees (if there were any) were of no value in 1945 but gradually increased in value up to the time of their sale. I will use the terms Value A, Value B and Value C for the values he arrived at for the years 1961, 1969 and 1971, respectively.
Is my reasoning as follows correct?
At the time of the death of the first heir, his share of the 1961 value was one-fifth of Value A. Then I inherited one-fourth of that. At the time of the death of the second heir, his share of the 1969 value was one-fourth of Value B. Then I inherited one-third of that. At the time of the death of the third heir, his share of the 1971 value was one-third of Value C. Then I inherited one-half of that.
If the above is correct, would I not then add the values of each share as it passed to me to obtain the cost basis to subtract from the sale price to determine the capital gains? Would not the same apply to the other surviving heir? How can this be reported on Schedule D? Should the deduction (the cost basis) all be reported in the 1993 return, or should half be reported on each of the 1993 and 1994 returns, since half of the sale price was received in 1993 and half in 1994?o
A: Income generated by the outright sale of standing timber qualifies for capital gain treatment if the timber was held for investment.
In addition, the basis rules affecting property acquired by inheritance support your assumption that your ``cost basis'' in the timber will be determined based on the intervening value of the property each time you inherited an additional interest.
Because proceeds of the sale were received in two different tax years, the sale qualifies for installment reporting unless you elect not to use this method. By completing Form 6252, the reader will report the full amount of gain ``realized on the sale, $32,000 in my example, but will only ``recognize'' half of the gain in 1993. The other half of the gain will be deferred and recognized in 1994.
\ Answered by David Lucas of Lucas & Boatwright, CPA's.
by CNB