US war effort puts home sale - and tax break - on hold

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Q: After my wife died, I rented my house to a young family. They paid rent for two years and then decided that they wanted to buy it. But the husband is in the military and now in Afghanistan, so the sale has been postponed. The delay will make me ineligible for the capital-gains tax exemption. They still want to buy the house when he returns. Will the IRS make an exception and allow the exemption?
R.S., Yakima, Wash.

A: Vince Clanton, a certified financial planner in Atlanta, says that he isn't aware of any exceptions to the rule regarding the sale of a former primary residence that would apply in this circumstance. The key phrase of the 1997 law that covers this topic is in an IRS document issued Dec. 23, 2002, and titled IR-2002-142. It states: "To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale."

For a homeowner - in this case, you - to be assured of the right to exclude the gain, the sale should be completed within three years of the home no longer being your primary residence, Mr. Clanton says. It sounds as though this might still be a possibility.

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Q: I have a mortgage with an interest rate of 5.5 percent, and there is the possibility of my obtaining a personal loan with a rate of 2.9 percent. What I intend to do is prepay my mortgage, using this loan. I want to make sure there is no disadvantage in my doing so.
R.Z., via e-mail

A: After crunching the numbers you provided, Debra Morrison, a certified financial planner in Roseland, N.J., says that the math favors taking the 2.9 percent loan, since you would still be paying a net interest rate of 3.85 percent on your 5.5 percent taxdeductible mortgage (presuming you are in a 30 percent tax bracket).

But because the personal loan may be amortized over a substantially shorter period than that of your mortgage - say, 10 years versus your mortgage, which may be as long as 30 years - your gross payment to repay the personal loan may be much higher than you're currently paying, she says.

For example, the monthly payment on a $100,000, 5.5 percent, 30-year loan is $565, compared with a $959 payment for a $100,000, 2.9 percent, 10-year personal loan. "If you can handle the additional monthly cash flow, more power to you!" says Ms. Morrison.

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