The Case of the Mysterious Rising Rental Rate
Q: I have had a 30-year variable interest loan on a piece of rental property since 1977. As of this month, my interest rate will be increased to 11.613%. Last year the rate increased too. But at the same time, the variable rate on my home mortgage is dropping, and it looks as though other rates are as well. Why should my rental property rate continue to rise? --W.S.
A: Your question stumped our experts. There are, they said, few reasons your interest rate should continue to rise while virtually all major lending rate indexes are falling. They advise you to contact your lender immediately for a thorough explanation.
It is possible that your lender has made a terrible mistake or is mishandling your loan. Another possibility is that your loan is not tied to any cost-of-money index but is allowed to rise until it reaches a fixed ceiling. Terms of this type were prevalent in the late 1970s before state and federal regulations imposed rate ceilings and tied annual adjustments to cost-of-money indexes.
You might want to consider getting a new loan for your rental property now that interest rates are relatively low. And since you’ve owned the property for 14 years, you should have more than enough equity in the house to satisfy any lender.
Preserving Tax Status of a Pension Payoff
Q: When my wife was laid off last year, her employer paid off the vested portion of her pension plan in cash and company stock. What can we do with the stock to ensure that its value remains tax deferred? Our accountant gave us some choices, but I think they are wrong. We need sound advice at this point in our lives. --P.C.B.
A: You’re wise to seek a second opinion when you think you’ve been given poor advice. Your first instincts are often correct. Our advice assumes that your wife has not turned 59 1/2, the age at which taxpayers can begin taking distributions from their pensions and other retirement investments without penalty.
Your wife should transfer the cash portion of the pension payout into some sort of individual retirement account investment--savings account, stock brokerage account, etc.--within 60 days of receiving it to preserve its tax-deferred status.
The stock can be handled in a variety of ways. The important feature is that any transaction must be completed within 60 days of receiving the stock to keep your tax advantages.
You may open an IRA at a brokerage, deposit the stock and let it sit until you are ready to get into another stock or investment. Or you can sell the shares to a third party and put the entire proceeds into an IRA account.
This second choice, however, seems needless because if you put the shares into a brokerage account, you could sell them through that account and re-invest the proceeds on a tax-deferred basis out of the brokerage account.
Despite what you may have been told by your accountant or others, you may not sell the stock to yourself by investing the equivalent money in an IRA. Your stock must be sold to a third party.
Can a Lower CD Rate Be Taken as a Tax Loss?
Q: In 1984, I bought a 10-year certificate of deposit at Lincoln Savings Bank. The interest rate was 12.8% compounded daily. Last month I was advised that Great Western had taken over this account and that the interest rate on my CD would be 6.8% compounded daily. This change will cost me more than $20,000 in lost interest. May I take this as a loss on my income taxes? --B.J.K.
A: No. The IRS allows you to deduct only losses that you have actually incurred. You have not suffered any losses, only a severe case of failed expectations.
The law allows institutions that take over deposits from failed S&Ls; to change the interest rate and other terms of those deposits.
Why? Because failing thrifts often offer high rates to attract depositors--terms that often wind up contributing to their troubles. Once federal regulators step in, they do not want to perpetuate the problems that led to failure. So, the acquiring thrift is allowed to reset the terms on deposits to fit the conditions dictated by the merger.
Depositors do not have to accept the changed terms. Once notified of the change, they can move their deposit without penalty within the time allowed by the new owner.
Having an IRA as Well as Belonging to a 401(k)
Q: I belong to a 401(k) plan at work. May I also have an IRA account? --W.F.W.
A: Even if you are a member of a qualified pension plan, such as a 401(k), you can always have an IRA.
The issue is whether your contributions to the IRA will be tax-deductible. According to the IRS, you can make a tax-deductible contribution to an IRA only if your adjusted gross income does not exceed $40,000 for a married couple or $25,000 for an individual.
Mortgage Deduction for a Time Share
Q: Last year my husband and I purchased one week per year in a vacation time share. We were told at the time by the sales agent that the interest on the loan we took to make the purchase would be deductible as a second home mortgage. Now our accountant says no. Is he right? --J.L.
A: No. According to our experts, your accountant is wrong. Refer him to Section 1.163-T (p) (6) of the Internal Revenue Service’s temporary regulations for guidance.
