QUESTION: We went looking for a retirement house recently and were shocked to find that we cannot transfer the assessed value of our house in Los Angeles County to a neighboring county. Are they going to change this goof? To whom should we write in Sacramento to ask for a change in the law? --M. C.
ANSWER: Can you wait until Nov. 8? If so, your prayers might be answered by the California electorate. Prop. 90 on the Nov. 8 ballot offers the framework for solving the problem you have discovered.
In November, 1986, state voters approved an initiative allowing homeowners over age 55 to transfer the assessed value of a home they are selling to a new home, thus bypassing the reassessment and property tax increase that typically accompanies the purchase of a new home in California. However, there were some important restrictions to that initiative. One was that the homeowners had to purchase a home of equal or lesser value than the residence they were selling. Another was that both the old and new residence had to be in the same county.
Prop. 90 proposes to eliminate the second restriction and sets the stage for homeowners over age 55 to transfer the assessed value of their homes anywhere within the state.
But one important caveat: The county in which the replacement home is located must be a participant in the special property assessment program that Prop. 90 would create. In addition, the program would apply only to purchases made on or after the date the county in which the purchase is made agrees to join the program. Intercounty purchases made prior to Nov. 9 are not covered by the initiative.
Q: What is the tax obligation for the sale of family collections such as stamps, coins pictures and furniture. Stamps and coins have a face value. Would the amount realized above the face value of a coin or stamp be considered a taxable gain? What about gold coins? They are no longer legal tender.--E. S.
A: In this case, the tax law is fairly simple to apply.
The taxable gain from the sale of such “capital assets” as furniture, art work, stamps and coins is calculated by deducting your actual cost of the asset from your sales proceeds. The face value of coins and stamps is completely irrelevant, unless, of course, it happens to correspond to what you paid for the asset. Your profit from the transaction is considered a capital gain and under current law is treated as ordinary income for the purposes of taxation.
Q: In August, 1985, we invested $10,000 in a California Tax Exempt Bond Fund and purchased 727.8 shares for $13.74 each. We left the account untouched and allowed the interest to accumulate. In January, we withdrew $5,000, the equivalent of 352.6 shares at $14.18 each. Would it be correct for us to report to the Internal Revenue Service a per-share profit of 44 cents? How do we figure the gain inasmuch as we never withdrew any interest? --M. A.
A: Based on the information you have provided, we can’t answer your question with any precision. Your best solution is to return to the broker who helped you make the investment and ask for a statement precisely outlining what portion of your withdrawal was true “profit,” what was accumulated interest and what was a return of your original principal.
According to the tax advisers we consulted, if the bond fund was truly tax exempt, the interest it accumulated should be tax free. And obviously, your original principal is not taxed. However, if the fund generated any profits, they would be taxable. “Profit isn’t tax free even if it comes from tax-exempt bonds,” explains Margaret Bumcrot, a tax specialist with the certified public accounting firm of Muller, King & Mathys in Downey.
Q: We bought our house for $90,000 and expect to clear $180,000--after sales expenses--when we sell it. We expect to buy a new house for $160,000. Although we are over age 55, we do not want to take advantage of the one-time exclusion of $125,000 of profits because we anticipate accumulating even more tax exempt profits on the sale of this new house. Can we simply pay taxes on the $20,000 difference between the sales price of the old house and the cost of the new one and postpone taking advantage of the one-time exclusion? --E. L. S.
A: Yes. The strategy you have laid out is perfectly proper, and, according to the tax advisers we consulted, a sound one. In your case, you are buying a house that costs $20,000 less than the one you sold and are electing to pay taxes on that portion of your gain rather than take advantage of the one-time $125,000 gain exclusion available to taxpayers over age 55.
If you were to invoke the $125,000 exemption with this sale you would not be able to take full advantage of it because the gain on the sale of your old house is just $90,000. The law does not permit you to use just a portion of the exemption and save the remainder for a later sale. So whatever portion of the exemption you don’t use--in your case it would be $35,000--is forever lost. The tax advisers we consulted said it was probably better to pay taxes on the $20,000 gain that was not reinvested in a new house than to permanently forgo use of $35,000 worth of the home sellers’ exemption.
For a more complete explanation of how to handle your gain, consult Internal Revenue Service Form 2119. You must complete and file this form with your regular Form 1040 by the April 15 following the year of the sale of your house.