Homeowner May Have to Pay Bill Twice
QUESTION: Last year, I had some remodeling done on my home. Although I paid for the job in full, the contractor failed to pay the lumber company for the materials. The contractor has since filed for bankruptcy. Meanwhile, the lumber company has slapped a mechanic’s lien on my house. What are the ramifications of having a lien on a house? I’m not eager to pay for the lumber twice, but do I have any choice? Why can’t I just ignore the lien until I sell the house?--J. F.
ANSWER: Whatever you do, do not ignore the lien. It will not go away just because you prefer not to acknowledge it. And, until it is removed, the lien can only hamper your ability to sell or refinance your house. Your best course of action is to seek the advice of an attorney specializing in mechanic’s liens.
According to our experts, your lumber dealer was probably well within his rights to file the lien. However, an attorney can advise whether the lien was filed according to the strict legal procedures required for these matters. If it was improperly filed, your attorney should be able to tell you whether you can have it removed without having to pay the lumber dealer. Otherwise, you are probably stuck with paying the dealer for the materials.
After paying the lumber dealer, you still can seek reimbursement from your contractor. If the bill is for less than $2,000, the matter can be handled in Small Claims Court. However, even with a judgment in your favor, you have no assurance of being able to collect from your contractor, especially since he has filed for bankruptcy. You may end up out of luck, and a little poorer for it.
An attorney can evaluate the specific facts of your case and give you a more detailed assessment of your available choices. You can get help finding an attorney specializing in real estate and construction law from your local bar association, board of realtors or building industries association. You might also ask your local community college for a list of part-time law instructors; many colleges offer courses in real estate matters.
Q: I retired from my job three years ago and opened a consulting business. In the first year, I reported profits of $6,000 on my income tax return. In the second year, I reported profits of $2,500. However, this year, I had no income, and considerable expenses. May I report a loss? An inquiry to the Internal Revenue Service hot line gave me no clear answer, only that if I didn’t show three years of profitability out of five, I could expect an audit. I can’t guarantee my 1990 income any more than the IRS can guarantee the 1990 tax rate. What should I do?--P. E. S.
A: We took your question to Margaret Bumcrot, an accountant at Muller, King & Mathys, a public accounting firm in Downey. According to Bumcrot, the IRS quoted you its “hobby loss” rules, which restrict a taxpayer’s ability to write off losses from a secondary business activity, or “hobby,” against the income earned in the taxpayer’s principal occupation.
However, if you are engaged in a genuine business activity--whether part time or full time--you are allowed to write off any losses against other income you have that year. If you have no other income, you may carry the losses forward to the following year and deduct them from your business income then. Of course, if you are audited you will have to prove that your expenses are legitimate costs of doing business and that you are engaged in a genuine business, not a hobby.
Q: As a gift, a relative last year gave me a U.S. Treasury bond that matures in 10 years. The securities firm that sold the bond sent me a certificate of accrual indicating that I must report about $300 in interest to the IRS. Am I responsible for that each year, since the bond is in my name? Will I face any taxation when the bond comes due? Also, what was the tax benefit to the gift giver?--L. F.
A: Even though the bond was a gift, you must pay federal income taxes on the interest the bond generates each year. However, because this is a security issued by the U.S. Treasury, the interest is exempt from state and local taxes. Interest on bonds issued by private corporations is taxable at the state, local and federal levels.
You may think this is unfair, but what you are actually being taxed on is interest--not the gift itself. And, in fact, when the bond matures, the proceeds you receive will be completely tax-free to you since the bond was a gift.
Your relative got no tax break by giving you the bond. The tax code allows one individual to give any other person up to $10,000 per year, tax-free to the recipient.
Q: My mother and I will be receiving an inheritance from my aunt’s estate in England. Will our share be subject to either state or federal taxation here in the United States?--Y. B. P.
A: No. According to our experts, inheritances are not taxable income to their recipients, no matter where the estate was located. In the United States, the estate itself is taxed and the remaining proceeds are then distributed, tax-free to the recipients, according to the terms of the will. Even though the estate is in England, your share of it will not be taxed in the United States.
By the way, the amount you ultimately receive from your aunt’s estate will have already been adjusted for all applicable British inheritance and estate taxes.
