Tax Law and the Replacement Home

Q. We are buying a new house for less than we sold our old home. However, the new residence requires improvements. Will those count toward the purchase price and reduce or eliminate any potential tax we might owe on our deferred profit? Also, because my husband is older than 55, we are able to transfer our property tax base from our old house to our new one. However, we know this transfer works only if the new house is of equal or lesser value than the old. Will the improvements we make increase the value of the home and wipe out our chances to transfer the property tax base? -- C.P .

A. Permanent improvements made to a newly purchased home within 24 months of the sale of the old home are considered a part of the purchase price of the new home. So, if you complete your remodeling within the required time, the costs of any permanent improvements would reduce or eliminate any potential taxable gain you face on the sale.

You should have little or no problem transferring your old property tax base to your new home. So long as one of you is older than age 55 and the price of the home you purchase is equal to or less than the home you sold, your old assessed value will be carried forward to your new home. (These transfers are allowed for moves within each of the state’s 58 counties and between a handful of counties that have elected to participate in the intra-county transfer program.)

The value of any improvements you make after purchasing the home would be added to its initial assessed value; the improvements will not trigger a wholesale reassessment of the house. Furthermore, if the improvements are completed within 24 months of the home’s purchase and if their cost plus the purchase prices does not exceed the sale price of your current home, you would not be subject to any increase in your property tax base.

2-Year Rule on Home Replacement Is Firm

Q. Is there any way to apply for an extension on the time the government allows us to purchase a home with the untaxed proceeds from a home sale? Due to a divorce and a job loss, I have not been able to purchase a home within the 24-month period the tax code specifies. My replacement period expires next month. -- T.F.N .

A. The government allows almost no exemptions to the 24-month home replacement period. You must purchase a replacement home within 24 months of selling your house or pay taxes on any profit realized from the sale. The replacement home can be purchased 24 months before or after the original home is sold; the government allows either.

The only taxpayers exempted from this regulation are members of the armed forces called to active duty and workers whose jobs require that they move overseas.

Care and Feeding of U.S. Savings Bonds

Q. I have found it difficult to purchase U.S. Savings Bonds at my branch bank. What can I do? Also, will you explain what interest rate these bonds are currently paying and what rate I am guaranteed to get? How is that interest paid? It seems more complicated that it really should be. -- B.L .

A. Several years ago, the Federal Reserve Bank reorganized and streamlined its Savings Bond sales operations. As a result, only one Federal Reserve bank, the one in Kansas City, actually issues Savings Bonds. Private banks, which used to keep a stash of bonds of all denominations on hand for immediate sale to customers, now only process applications for bonds for issuance in Kansas City.

Taxpayers can get bond applications from their local banks or call the Federal Reserve Bank of Kansas City at (800) 333-2919 for an application. The form must be mailed to Kansas City along with a check for the appropriate amount. Bonds are returned by mail to the purchaser within several weeks.

Newly issued Series EE bonds currently pay a guaranteed minimum interest rate of 4% for the first five years after issuance. Bonds held longer than five years pay the higher of the 4% guaranteed rate or the then-current market variable interest rate. Bonds held more than five years are currently paying 4.7%. The market variable interest rate is adjusted twice a year.

Bonds are purchased for half of face value. They accrue interest as they are held and upon maturity may be redeemed at face value. Series EE bonds issued now mature in 18 years. Interest on general purpose U.S. Savings Bonds is exempt from state and local taxes, but is subject to federal income taxes.

However, bonds purchased for a child’s college education may be exempt from federal taxes if the family qualifies for the program. Eligibility for the College Saver program depends on a family’s adjusted gross income at the time the bonds are redeemed. College Saver bonds must be issued in the names of the parents, not the students.

Property’s Original Tax Basis Survives

Q. I sold a piece of property several years ago and accepted installment payments. I am still owed about $73,000, most of which is pure profit. I am getting on in years and wonder about the tax liabilities on this note my heirs may face. -- W.A.

A. The tax basis of a property subject to an installment sale note or trust deed is not treated to a step-up in value upon the death of the note holder. Your heirs will inherit your original tax basis on the property in question and when they collect on the $73,000 note, they will be subject to the same income tax requirements as you if you collect on it. The payoff of an installment note after the beneficiary’s death is one of several items the government considers “income in respect to a decedent.”