Pay Home Sale’s Profit Tax Now--It’s Cheaper
Q: If you sell your home, making a profit, and do not know whether you will buy another home, are you better off paying the capital gains taxes immediately or waiting until the two-year replacement period lapses? Does the government charge you interest on the capital gains tax that should have been paid in the year the home was sold? If so, at what rate? What about state taxes? --E. J. M.
A: Here’s the most important fact you should know when trying to decide how to fill out our tax form: Uncle Sam and the state of California will charge you interest--right now the rate is about 10%--on any capital gains taxes you owe from the sale of your house if you do not buy a replacement home of equal or greater value within 24 months.
This should help you decide whether to pay the taxes immediately or wait. If you think there is a strong likelihood that you will owe capital gains taxes from your home sale, you are better off completing IRS Form 2119 and paying the government as soon as you have to, says Colin Cooper, a Tustin certified public accountant. Otherwise, you face paying the government far more in interest than you probably will earn on the money if you invested it. The government is charging about 10% interest on back taxes--and even though it’s interest on taxes, the charge is not tax deductable. Cooper estimates that you would have to make about 18% on an investment to make postponing paying the taxes worthwhile. “In theory, it’s possible,” Cooper says, “but you’re not likely to do that in real life.”
If it turns out that you don’t owe the government any money, and you’ve already paid, you can always file an amended return and seek a refund. However, as you might expect, even though the government charges you interest on owed back taxes, it does not pay you interest on any overpayment.
If you believe that you will buy a replacement home of equal or greater value within the allowed two years, you can wait to report the gain and subsequent new-home purchase. However, you still must report the sale for the tax year in which it was made.
Muni Bonds Aren’t Good IRA Investment
Q: I have several questions about individual retirement accounts. Municipal bonds are exempt from state and local taxes. If I buy these bonds for my IRA, would the interest on these bonds be exempt from taxes when I withdraw the funds? Also, when I am between ages 59 1/2 and 70 1/2, may I withdraw whatever amount I want from my IRA, or does it have to be the same amount each year? Finally, once I reach age 70 1/2 and must make mandatory withdrawals, is the required amount a minimum or is it the maximum? --F. W. S.
A: Despite what you might have read or been told by some hustling investment counselor, municipal bonds, or any other tax exempt investment, are poor choices for your individual retirement account. Why? All withdrawals of previously untaxed money from an individual retirement account are taxable regardless of the type of investment account that the funds are in. So even if the funds are generating what would otherwise be tax-exempt interest, because they are in an IRA, that interest is taxable when the money is withdrawn. You do not want to put your IRA fund into tax-exempt securities, which typically earn lower interest than their taxable counterparts, if those funds will be taxed when you withdraw them.
Taxpayers between ages 59 1/2 and 70 1/2 may withdraw any amount they want from their IRAs and are taxed on the amount that they withdraw. There is neither a minimum nor a maximum amount. At age 70 1/2, you will be required to begin annual withdrawals of a minimum amount. The exact amount of this mandatory withdrawal will depend on the type of distribution you elect to take. But, in any case, the amount is only a minimum. You may withdraw more if you want--as long as you pay taxes on what you take out.
For more information about IRA withdrawals, you should consult publication No. 590 from the Internal Revenue Service. To order this pamphlet, simply call 1-800-TAX-FORM. This number should not be used to solicit tax advice because it is staffed with workers trained only to take orders for IRS publications.
Mobile Home Rent Not a Selling Expense
Q: My husband and I own a small mobile home that we are having great difficulty selling in today’s market. It has been on the market for nearly a year, and we have yet to get a serious nibble. Meanwhile, we continue to pay monthly rent on the pad in the mobile home park. When we finally sell the home, may we include the rent to the mobile home park as a selling expense? --L. L.
A: No. Although keeping the home in the park may seem like a necessary selling expense to you, you are not required to stay there. You could, for example, move the home to a storage facility--or even your own back yard. The mobile home park rent is not a necessary selling expense and cannot be deducted as such from your selling price when you compute your taxible basis in the home.
