Transferring an Interest in Home Has Pitfalls
Q: Your recent columns about parents making gifts to their children got me to thinking about ways to transfer an interest in my house to my daughter to minimize the tax consequences of my death. May parents assign a $20,000 credit against their house to their child each year until the child, in effect, owns the house? --G. J. J.
A: This is a tricky area of the law, and you shouldn’t wander into it without expert advice and a thorough understanding of the potential arguments and hassles you might face from the Internal Revenue Service. Our experts say that if you attempt to give your daughter your house in annual increments of $20,000 worth of equity, the IRS is likely to claim that you have an agreement with your child allowing you to live in the house for the rest of your life. Under these circumstances, the gift of the house is not recognized when it comes time to compute estate taxes, and your house would still be included in the estate. Our experts recommend that you abandon your plan rather than face certain challenge from the IRS.
However, if you still want to proceed, our experts say you would be wise to consult an expert who can advise you as to the issues you will face. For example: Do you still plan to live in the house as you gradually give it away? If so, then you’d better consider paying your daughter a fair monthly rent for her share of the house.
You should also know that as your landlord, your daughter could evict you if she chose. Any attempt to preclude such action with a contract or other written agreement could be used by the IRS to prove its contention of a prior agreement.
It’s Easy for Divorcing Couples to Figure Costs
Q: When my wife and I married three years ago, we each sold a condo and used the proceeds for a down payment on a house costing $200,000. Now we are divorcing and will sell the house for $300,000. What do we have to do to defer paying taxes on the gain we will each realize from the sale? --T. R. O.
A: It’s actually quite simple for divorcing couples to figure out how much they each have to spend on a new home to avoid taxes on their share of the gain from the sale of their jointly owned house. You have only to divide the sales price of your jointly owned home in half. In your case, you and your spouse must each buy homes worth at least $150,000 to defer taxes on the gain you will realize from the sale of the house.
In case you are wondering what tax basis you are leaving the marriage with, you can compute it by subtracting the gains you realized from your prior home sales from the purchase price of the new home you buy. For example, if you buy a new home for $150,000 and had gains of $20,000 from the sale of your condo and $50,000 from the sale of your house, then the basis in your new house would be $80,000.
Note From Failed Bank May Not Be Total Loss
Q: Several years ago I purchased a note from a savings bank, and for two years I regularly received interest payments. However, last year I received a letter from the Resolution Trust Corp. saying the bank had been put into conservatorship and that it was “unlikely that any funds would be paid” me. I was told to submit a claim, and I have. But I have heard nothing. Is there anything more I can do to get my money back, or should I just kiss it goodby? Can I claim an investment loss on my taxes? --M. J. G.
A: Your first step should be to get back in touch with the branch office of the Resolution Trust Corp. that originally contacted you. Direct your inquiry to that branch’s “claims and settlement office” and ask for a “certificate of claim and liquidation.” This document certifies that your claim against the bank’s assets has been received and recorded. Without this document, your claim cannot be processed.
As you have no doubt read, the huge number of thrift liquidations throughout the country has caused delays in resolving individual cases. Although the RTC has been most pessimistic so far with you, it is still likely that you will receive some sort of partial settlement when the bank’s assets are finally liquidated. Of course, this may take years and you may only receive cents on the dollar in return, but until the process is complete, you would not be wise to write off your investment.
The law makes it perfectly clear that you can write off the investment--and deduct your losses on your income taxes--only when it can be reasonably determined that the investment is wholly worthless. If you do receive a partial settlement, you are entitled to write off the remainder of your investment on your taxes. Your losses can be used to offset any investment gains and up to $3,000 per year in ordinary income. Any excess loss may be carried over to subsequent years.
