Getting Tax Benefits of Co-Owned House
QUESTION: My wife and I purchased a house for our daughter, making the down payment and qualifying for the loan. The mortgage is in our name, but she is included on the title. She will eventually repay us for the down payment. She is paying the mortgage and the property taxes. Can she claim these expenses as deductions on her income tax form? --J. P. L.
ANSWER: Without knowing precisely how your arrangement with your daughter is structured, it is a bit difficult to make an exact call. But, generally speaking, your daughter should be able to claim the mortgage interest and property taxes as a tax deduction.
The reasons, say our advisers, are several. First, your daughter’s name is included on the title to the property, clearly establishing her as one of its owners. Further, she is actually making the mortgage and property tax payments. Finally, from what you have told us, it appears that the intent of your arrangement is to help your daughter buy her house, not to participate in an equity sharing or other property investment deal with her.
The final point, say our advisers, is crucial. If this were a business deal and you intended to split the profit when the house is sold, then the tax deductions would be treated differently, and your daughter would not qualify for 100% of them.
Claiming Worthless Investment Is Tricky
Q: My wife and I purchased debentures from a company that filed for Chapter 11 bankruptcy reorganization earlier this year. The case is complex and it appears that the resolution of the proceedings will be delayed indefinitely. Meanwhile, all indications are that our debentures are worthless, although the court has not so ruled. What is the earliest date that we can claim a loss on these debentures for income tax purposes? Are the losses treated the same under federal and California income tax laws? Can some of the losses offset ordinary income? How long can the losses be carried forward if we cannot use them all in a single year? --R. L. J.
A: Federal laws do not spell out exactly when you can claim a capital loss on a soured investment. The law says only that you may claim the loss when you are “reasonably sure” that you have no hope of recovering any part of your investment. You may reach the conclusion that your investment is completely worthless before a Chapter 11 proceeding is completed, and in fact, a bankruptcy filing is not even required.
The call is yours; you decide when your investment is worthless. However, be warned that the IRS can, and often does, challenge these determinations. So you would not want to act too hastily. If the IRS successfully challenges your call, you would be subject to back taxes and penalties.
On the other hand, you do not want to wait too long to recognize a capital loss. The statute of limitations on these matters is three years. So, if you wait too long and the IRS rules that you should have recognized the loss earlier, you could lose the capital loss deduction entirely.
As you can see, the IRS requires you to walk a fine line. Our advisers recommend that you take the loss as soon as you have evidence to reasonably conclude that the investment is gone. If you have any doubts, it probably wouldn’t hurt to consult an attorney, accountant or other trusted professional.
Your losses are treated identically under federal and California tax laws. These laws allow you to deduct your capital losses to offset all of your capital gains in a given year. If you have any remaining capital losses, you may deduct up to $3,000 per year against your ordinary income. You may continue this procedure annually until the entire capital loss is written off.
Usually Have to Sell Stock to Take Loss
Q: I bought 50 shares of stock four years ago for about $500. Today each share is worth a tenth of a cent, for a total value of 50 cents. How do I go about claiming the loss on my taxes? Can I just decide that they are worthless, or do I have to sell them first? --D. L. D.
A: In most cases, but not yours and we’ll explain why later, you must sell your severely devalued shares and then claim your losses on your income tax form as explained in the last paragraph of the previous answer. So if you had bought 50 shares of stock for $10 each and they each were worth $5 now, you would have to sell them before you could claim the $250 loss.
However, in your extreme case, your shares are now worth a total of 50 cents, and it is doubtful that you could find a buyer. Further, if you did, the cost of selling would be far greater than your proceeds. You are probably justified in determining that your investment is worthless and writing it off as explained in the previous answer.
Can’t Deduct Your Gift to Children
Q: I desperately need an answer to this question. I understand that you can deduct from your income taxes up to $10,000 that you give as a gift to your children. But where on the tax form do you list this gift? --M. T. O.
A: You understood incorrectly. One individual may give another individual $10,000 a year tax free, but the donor does not get a tax deduction for making the gift. The recipient is merely allowed to get the money without paying taxes on it. Unless gifts are made to a qualified charity, they are not tax deductible, no matter what their amount.
Better Off to Sell Shares and Pay Tax
Q: In 1949 and again in 1959, my wife and I bought some stock for a total of $2,245. Today those shares are worth $3,531.15, for a capital gain of $1,286.15. How will this be taxed? --F. K.
A: When you sell the shares, your proceeds will be subject to a capital gains tax, which under current law is the same rate as ordinary income. So if you are paying 15% of your income in taxes, you can generally figure that 15% of your gain will be taxed.
But the real question is why are you still holding onto these shares? According to our experts, your investment has grown at a compound annual rate of just 1.3%. Perhaps it is best to sell the shares, pay the tax and be done with it. Your money can easily do better in several other investments, including government securities or an insured bank account.
