Tax Brake with Robert G. Nath, Esq.

First, a primer. There's a big diff between “basis” and “mortgage debt.” You know this, but have psychologically blocked it, if you owned a home in the late '80s and borrowed against the ballistic prices. “Basis” is what the tax laws use to measure your profit in the home (“ gain or loss”). Mortgage debt is simply what you owe on the home. Say you bought a home in 1995 for $100,000, and put down $80,000. This was your first home. Your tax basis is $100,000, your debt $80,000. Now, five years later, you decide to invest in GetRichQuick.com. Your home is worth $150,000, so you borrow another $50,000. Your tax basis is still $100,000, but now the debt is $130,000.

If you sell the home for $150,000, you have a profit of $50,000. But your debt is still $130,000. Now, in this particular example, you'll have no problem, because the tax laws exclude the first $250,000 of profit from taxation ($500,000 if you are married filing jointly). But this example shows the big difference between the concepts of basis and debt.

Now add another issue. What IS your basis? The $250/500K exclusion noted above came into the law just a few years ago. Many people own homes governed by the old “rollover” provisions. Under those rules, if you sold Home 1 and had a $50,000 profit, you did not pay tax, but simply reduced the tax basis of the new home. Example: Home 1 sells for 100K. You bought it for 50K. So the profit is 50K. Home 2 costs 150K. The new basis of Home 2 is NOT 150K, but 100K, that is, the cost (150K) reduced by the 50K of profit on Home 1. The effect of this device is to postpone the tax. If you are lucky enough to die while this is going on, you never pay the tax. Those old, rollover rules still apply to dictate the basis of your current home if you bought your current home under those rules.

For divorcing couples, each is entitled under the new rules to a $250,000 exclusion of profit from taxation. But the detailed rules on how this works in a divorce can be tricky, beyond the scope of this one little ole article. But, Hey, that just means.....Stay tuned!

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