Sell S&L; Stock to a Friend, Then Declare Loss

Q: I own about 900 shares of Great American Savings. I paid about $14 per share for the stock, and it's now worth about 30 cents per share. It would cost me more to sell it. Can I just write off my loss of more than $13,000 with my 1990 tax filing, or do I have to wait until I sell the shares? --M. R. S.

A: The tax code makes it quite clear that before a taxpayer can declare a capital loss, the investment must be "wholly worthless." Shares valued at 30 cents each--even if it would cost more to sell them--are not wholly worthless, despite what you probably feel.

What can you do to realize your loss, without incurring unnecessary selling expense? One of our legal experts suggests that you sell them to a friend for a nominal amount. According to our legal experts, even property of minor value must be formally disposed of before the investment loss can be a legitimate income tax deduction.

By selling your shares to a friend you can avoid commission expenses charged by brokers and still formally dispose of the shares. To sell the shares without a broker, simply contact the transfer agent handling the shares for Great American and inform them of the sale and the name of the new owner. The transfer agent should send you a Form 1099 to use when preparing your income tax return.

Appraisers or Agents Can Evaluate a House

Q: You often talk about the taxable basis of a house being elevated to its value on the date of death of one of the spouses. How do I determine what the value of the house is, and what proof do I need to show to the Internal Revenue Service? --C. P.

A: Even if you have no intention of selling your house immediately, a real estate agent can help you determine both its current value as well as its value at some date in the past. Of course, agents can't be expected to do this extra work, generally at no charge, without expecting that you might, someday, use the services for which they are paid: selling homes. So, if you have no reasonable expectation of selling your house, you might consider hiring an appraiser to determine the value of your house. Of course, you will have to pay for this service, but you will have no obligation to anyone when you decide to sell.

Both the broker and appraiser will search computerized databases of home sales in your neighborhood to determine your home's value. An appraiser should give you a written report that would be perfectly acceptable to the IRS. A real estate agent would no doubt give you a written report if you asked for it.

California Exempts Out-of-State Residents

Q: I am moving to Texas from California and would like to leave my personal bank accounts in California because I think the banks here are safer. Will I be required to pay California state income tax on that account's interest earnings once I move to TexaK.

A: No. The state of California does not levy income tax on interest generated by bank accounts held by residents of other states. The state does assess tax on retirement pensions based on work performed while a taxpayer was a resident of the state. Taxes are also levied on profits from California real estate deals. But "personal property," a category that includes bank account earnings and brokerage accounts, are exempt from state taxes once the holder leaves the state.

Penalty on Non-Taxed Funds Not Deductible

Q: I cashed out of my individual retirement account annuity early, and subsequently had to pay a 6% penalty. Is any part of this penalty deductible on my income taJ.

A: Probably not, but it's impossible to give a precise answer based on the facts you've provided here. If the penalty fee was deducted from the proceeds of the annuity you received, then you are not entitled to any deduction. Remember, IRA funds have not yet been taxed by the IRS; they are tax-deferred accounts. The government is not going to allow you a tax deduction for penalties taken from accounts that have not been taxed.

You may have a deduction if you were required to pay the penalty outside of the account--that is, with money that had already been taxed. You should check with the insurance company or brokerage that sold you the annuity for the precise conditions of the contract.

Mortgage Deduction Falls Through Cracks

Q: My mother made the down payment and is the sole owner of record of a condo that my two brothers and I live in. The three of us share the mortgage, taxes and other living expenses equally. Who is eligible for the mortgage interest and property tax deductions for income tax purposes? --B. H.

A: Unfortunately, the way you've set this deal up, none of you can rightfully claim the deductions. You fellows can't be cause you're not the property owners. Your mother can't because she didn't make the payments.

As you can see, your arrangement doesn't work well from a tax standpoint. How about renting the house from your mother? Your mother would then make the mortgage and property tax payments with your rent payments--and make herself eligible for the tax deduction.

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