Dear Liz: I lived at home for quite a while—around 45 years. During that time, my daughter and her family moved in because of the 2008 financial crisis. I haven’t charged her rent, which I guess seemed reasonable at the time.
However, I relocated five years ago, and they’re still living there without paying rent.
I’m a bit concerned because I understand that when I sell the house, the capital gains tax won’t apply as it’s no longer my primary residence. Are there any tricky rules that might benefit me?
Answer: Unfortunately, the IRS doesn’t consider arrangements with family members as a qualifying factor for changing the home sale exclusion rules.
Capital gains are figured by taking the sales income, subtracting selling costs, and then deducting your home’s tax basis. Generally, your tax basis would include the purchase price plus any qualifying upgrades you made.
You can potentially exclude capital gains up to $250,000 ($500,000 for joint filers), but only if you owned and lived in the home for at least two out of the last five years. There’s also a partial exclusion for people who didn’t meet the two-year rule due to work or health issues.
Financial Institutions Might Not Recognize Power of Attorney Documents
Dear Liz: I read your piece about a parent having to step in for an incapacitated child. You made a good point—every adult should have a power of attorney and health care proxy in place. Solid advice!
However, I learned the hard way while handling my father’s illness and dealing with real estate that these general documents aren’t always accepted by the entities that they’re meant for.
His banks and mortgage companies only recognized specific versions of these documents.
Fortunately, we managed to navigate it, but I had to gather each document with my father’s signature, which was incredibly stressful given the circumstances. It really would be wise for people to check if their banks require any specific forms.
Answer: Financial institutions should accept properly drafted power of attorney documents, but some insist on their own specific versions, as noted by estate planning lawyer Burton Mitchell.
“Sometimes, you might be able to bypass these requirements by escalating the matter within your institution. But, it’s unnecessarily complicated and exhausting,” he explains.
To avoid potential issues in the future, it’s a good idea to check with your financial institution now.
If you have questions, Liz Weston is a certified financial planner and personal finance columnist. You can send inquiries to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or reach out via the contact form at AskLizWeston.com.
