RENOVATION RECEIPTS ARE LOST – WHAT CAN HOMEOWNER DO? (2024)

QUESTION: I recently sold my home because of divorce. My ex-husband left me with the house and two good kids to raise. He’s supposed to pay child support, but he has moved out of state and is hard to locate because he works in construction. To get some money, I had to sell the house and move to an apartment. About five years ago we spent around $25,000 remodeling the house. But I can’t find the receipts, which my tax adviser says I need to prove my cost basis for the house. What should I do?

ANSWER: If you are audited by the IRS on the sale of your principal residence but you can’t produce the receipts for capital improvements, the IRS auditor is authorized to accept reasonable cost estimates.

Of course, the receipts are your best evidence of your renovation expenses. If you don’t have them, do your best to estimate the cost. Your tax adviser can assist you.

Taxes on subdivided land

Q: My wife and I own our home, which is on 14 acres of semirural land. A developer wants to buy about 11 acres for subdividing. This is fine with us, because we can use the money. Our problem is that we bought this property about 18 years ago for practically nothing compared to its value today. If we sell, is there any way we can use that “over 55 rule” or some other tax exemption to avoid paying a huge profit tax?

A: No. The “over 55 rule” $125,000 home sale tax exemption only applies to the sale of your principal residence. Similarly, the “rollover residence replacement rule” only defers profit tax if you buy a replacement principal residence of equal or greater cost within 24 months before or after a home sale.

The only possibility is an Internal Revenue Code 1031 tax-deferred exchange. To defer profit tax, you must acquire a replacement property held for investment or use in a trade or business. Please consult your tax adviser for details.

Son needs help to get loan

Q: Our son, 23, is very ambitious. After graduating from college he got an excellent job. Now he wants to buy a condo. He found one he can afford. We’ve agreed to give him the down payment, but the mortgage company says he doesn’t make enough income to meet the “ratios,” because his payments will take 39 percent of his income. His only debt is a car loan. If we co-sign for his mortgage, he can qualify. Do you think we should do this?

A: Conservative, old-fashioned mortgage lenders say a home buyer’s housing cost should not exceed 28 percent of gross income. Some bend the rules up to 33 percent. But a few portfolio lenders approve loans for creditworthy borrowers that take up to 50 percent of income.

Although I’m concerned that 39 percent of income for housing costs is on the high side, I’m more worried about your son buying a condo. Some condos are very difficult to resell. Check on the desirability of the condo he wants to buy. Also investigate how they have appreciated in market value. If the condo complex checks out well, maybe you should help your ambitious son get started with his own home.

However, please be aware of your co-signer responsibilities. If your son defaults, it will reflect adversely on your credit report. I’ll always be grateful to my own parents, who loaned me $5,000 to buy my first real estate (a triplex). If your son is financially responsible, and if the condo complex is highly desirable with few condos for sale, it might be worth taking a chance on him.

Pluses of wraparound plan

Q: I am selling my house. I have agreed to carry back a $22,000 second mortgage. My real estate agent suggests I take back a wraparound mortgage instead. Is that a good idea? The buyer is taking over my FHA first mortgage.

A: Your real estate agent gave you excellent advice. Although a wraparound mortgage is really a second mortgage, it “wraps around” the existing first mortgage.

The buyer makes one monthly wraparound mortgage payment to you. After receiving it, you use part of the money to keep up payments on the underlying FHA first mortgage. The big benefit for you is always knowing the payments are made on the first mortgage.

The result is the first mortgage never goes into default. If the buyer should miss a payment to you, you can begin foreclosure. A wraparound mortgage allows you to remain in control.

Can a life estate be sold?

Q: When my husband died about 12 years ago, I received a life estate in our home. After I die, it goes to the state university. I am 67 and in very good health. But I want to move to a better climate. I talked to my lawyer, who says I can’t sell my life estate. Is this true? I was hoping to get some cash to buy a condo in a warm climate.

A: Presuming your life estate does not require you to continue living in the house, you can sell your life estate. However, it probably won’t produce much cash. The reason is that when you die, the life estate dies too.

Perhaps a neighbor will give you a few thousand dollars for your life estate. The neighbor can then rent the house to tenants.

Or you can hire a property management company to rent the house and you will receive the rental income. Either way, you won’t receive much cash or income, because a life estate that can end any moment isn’t worth much. Incidentally, if you sell the life estate, the buyer should take out an insurance policy on your life.