Sharing Profits, Expenses on Income Property
Q: Here’s a hypothetical situation: Two people buy a house together for $200,000. Party One puts up one-third of the down payment and Party Two, who will live in the house, puts up two-thirds. What is the best division of the mortgage and other expenses? How are profits divided when the house is sold? --I.S.
A: It’s not as difficult as you might imagine to handle this situation, which is becoming increasingly common as parents help their children buy their first home and attempt to invest a little in the real estate market for themselves.
First of all, our experts say, you should determine the fair market rental for the neighborhood in which the house is located. Then discount it by 20%, because your house will be occupied by an owner, and you face little security risk as a landlord. This is the amount Party Two should be obligated to pay as “rent.”
Let’s say you have a $2,000 monthly mortgage payment, including taxes and insurance. Let’s also say that monthly rents in your neighborhood are $1,000. Party Two should automatically pay $800 ($1,000 discounted by 20%) of the mortgage as the occupier of the house. The remaining $1,200--and all other expenses except those normally paid by a renter, such as utilities--should be divided between the parties according to their pro rata share of the house.
So Party One would pay $400 per month of the mortgage and one-third of all other expenses, and Party Two would pay $1,600 of the mortgage plus two-thirds of the expenses. You may want to adjust the fair market rent that the occupier is responsible for paying as rents in the neighborhood fluctuate.
When you sell the house, profits should be divided according to pro rata ownership: one-third for Party One and two-thirds for Party Two.
Keeping Control of Funds Given to a Child
Q: Last year I set up a savings account under the California Uniform Gift to Minors Act for my 1-year-old nephew. Is there a way under this law to maintain control of the funds until he reaches 21, instead of 18? I want the account to be used for his college education, and I fear that, unless some control is maintained, a spending spree will result. --G.F.
A: No, you cannot do what you propose under the California Uniform Gift to Minors Act. However, there are ways you could maintain control over money you give to your nephew.
You could open a joint savings account that requires two signatures to make withdrawals. You could also establish an irrevocable trust that could not be withdrawn until your nephew reaches an age you specify. However, unless you have a fairly large account--$100,000 minimum, our experts say--the set-up fees and annual accounting charges would be too great for the benefit you might receive.
Another Case of You Can’t Take It With You
Q: I will soon be retiring and moving to another country. I would like to transfer my Individual Retirement Account funds to a bank or investment company there. Are there any IRS restrictions on moving IRA funds to another country? --F.W.S.
A: Yes, the IRS forbids it. The tax code defines an IRA as an account held in the United States and organized under U.S. law.
Tax Implications of Cashing in an Annuity
Q: For the last 39 years I have paid into an annuity that is now maturing with a face value of $10,000. My after-tax contributions to the annuity were $3,720, and I have received $6,934 in dividends, which were applied directly toward the premium. These funds have never been taxed. My choice now is to take a $60-per-month pay-out for the rest of my life or cash in the annuity and take a lump sum of $10,000. I like the latter option, but must I pay taxes on the $6,934 in dividends? --L.W.
A: Actually, you have a third option: rolling the annuity over into another annuity through a 1035 exchange. This is the option our tax planners like. The exchange, which would be tax-deferred, would allow you to put the money into a similar investment that may give you a higher return and defer your tax responsibility. You should consult a financial planner or tax accountant before proceeding with this course of action, however, because the exchange must be done to the satisfaction of the Internal Revenue Service.
If you take the lump sum payout, you would indeed have to pay taxes on the $6,934 that you received tax-free over the years.
Confused Over Pension, Social Security Benefits
Q: A recent column about public pensions offsetting Social Security spousal benefits confused me. I have a state teacher’s pension. I understand that this would offset any Social Security benefits I might receive on my husband’s account. But I don’t think there is any offset of any benefits I might receive on my own account. Is this understanding correct? --S.K.
A: Technically, yes. But in practice, your own Social Security benefits are reduced because you receive a public employee’s pension. However, this reduction is not called an “offset.” For reasons best known to government bureaucrats, it’s called a “windfall elimination provision.” The net effect is the same: Your Social Security benefits are less than they otherwise would be.
