Losing Lottery Tickets Are Worthless as Tax Writeoffs

QUESTION: I regularly play the California state lottery. They say that half the money collected by the lottery goes to the state’s public schools. In other words, anyone participating in the lottery is contributing to a worthy cause. It would make sense that one should be able to deduct half of the cost of buying lottery tickets as a charitable contribution. I have kept all my old lottery tickets and receipts. Will I be able to deduct half of what I spent from my 1988 taxes?--V. F. C.

ANSWER: Sorry, but neither the Internal Revenue Service nor the state Franchise Tax Board considers playing the lottery the equivalent of making a charitable contribution. According to these tax collecting authorities, your primary motivation for buying a lottery ticket is to take a chance at winning a prize, not to make a charitable contribution.

However, if you win at the lottery, the IRS allows you to deduct your costs of buying tickets from your winnings if you itemize your deductions. But you may not deduct losses in excess of your winnings. The state does not tax California lottery winnings.

Q: I have loaned a friend $20,000 for 10 years so he can buy a piece of real estate. I have received the standard forms and receipt. Is that all that is necessary, or do I need to register the note anywhere for my protection in case the building is sold? Please help.--L. S.

A: You really haven’t given us enough information about this loan for us to give you precise advice. For example, you haven’t said if the note you received was a straight “promissory note”--which is a lot like a fancy IOU--or a trust deed secured by the real estate that your friend purchased.

If you received a trust deed--by far the preferable type of loan, from a lender’s perspective--you should record the document in your local county recorder’s office. If you don’t record the deed, it is possible that the property could be sold without your being notified and, worse yet, repaid.

If you received a straight promissory note, it must be notarized before it can be considered a legally binding document. Even then, if the borrower defaults on the loan, your only recourse is to sue to recover your money.

Q: My two brothers and I will be inheriting equal shares of my father’s estate, and I expect that each of us will get about $15,000--the proceeds from the sale of a farm in Iowa. I don’t expect to have to pay inheritance taxes on the amount, but I am wondering if the estate will have to pay any federal income taxes. The lawyer handling the estate says the estate will have to file a tax form. What does all this mean?--H. S.

A: According to the tax specialists we consulted, an estate is a taxable entity and is required to file a tax return if it has a gross annual income of more than $600, regardless of whether the estate actually has to pay any taxes. Computing the tax owed on the farm sale shouldn’t be difficult. According to the general rules governing inheritances, the value of the farm will be set at the fair market value on the date of your father’s death. Any gain would be the difference between that value and the price the estate receives for the farm. So, if the farm is sold near the date of death, it isn’t too likely that there would be much, if any, gain to be taxed.

Q: My partner and I bought a house eight years ago and have owned it as 50-50 partners. I recent bought out my partner and now own 100% of the house. Will I be assessed for my new half interest in the house at the price I paid my partner, or will the entire house be reappraised?--E. R. S.

A: You haven’t given us all the information we need to give you a complete answer, so we will have to make some assumptions. We are going to assume that you and your partner are unrelated and that you bought the property as 50-50 partners at the same time. Under these circumstances, buying out your partner will only result in a reassessment of the half of the house you recently acquired, according to Roy Sharman of the Los Angeles County Assessor’s Office.

For example, let’s assume that before you bought out your partner, the house’s assessed value was $150,000, with your share being worth $75,000. Let’s assume that the house was worth $300,000 when you bought out your partner and that you paid him $150,000 for his interest. Your new assessed value for property tax purposes will be $225,000: $75,000 worth of “original” value belonging to you and $150,000 of “new” value that you recently purchased.

Q: We are contemplating selling our home, which we have lived in for the last 2 1/2 years, and we expect to realize a substantial gain over the original sales price. We are both over age 55 and have never taken advantage of the one-time exclusion of $125,000 of profits on the sale of a home. Have we lived in our house long enough to take advantage of the exemption?--W. A. H.

A: Hold on just a few more months and you’ll be eligible. In order to take advantage of the $125,000 exclusion, either you or your spouse must be over age 55 and you must have lived in the house for three of the last five years. These need not be three consecutive years, and you are credited with occupying the house even if you rented it during some short, temporary vacations.

So, if you have lived in the house continuously for the last 2 1/2 years, meet the age test and have never taken advantage of this special exemption, you should be eligible for the exclusion in about six months.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.