Condo Rent-Back Idea Is Probably Unfeasible
Q: My wife and I are in our 70s and live in a condo worth about $150,000. We live on a tight budget and could use some extra cash for daily expenses. We could sell the condo, but we love it and want to spend the rest of our lives here. I am wondering if there is a way for us to sell the condo to an investor who would let us live here at rent of up to $1,000 per month for the rest of our lives. Am I just dreaming, or is this possible? --R.H.
A: Theoretically, what you are proposing is possible. But from an economic and practical point of view, it is highly unlikely that you would be able to find an investor to go along with it.
Why? An investor would be unlikely to make any money under the proposition. You and your wife probably have a life expectancy of at least another 10 years. Why would an investor agree to a rent ceiling for that time? Further, how far toward paying down the investor’s expenses would $1,000 per month go? Our experts made some fast calculations and estimated that an investor would have $1,500 per month in expenses (mortgage payments, taxes, insurance and upkeep) and forgone interest on his invested capital. Would you take such a deal? Probably not.
An increasing number of older people whose primary asset is their appreciated real estate are opting for what are called “reverse mortgages.” Under this program, the homeowner borrows against the equity in his house to gain additional living expense money. However, because these programs tend to deplete the equity of a home quickly, they are best suited to people who are in their late 70s or older with a sizable home equity. Unfortunately, you are too young and your condo isn’t worth enough for you to be considered a prime candidate for such a program.
For more information about reverse mortgages, contact the American Assn. of Retired Persons. Send a postcard asking for “Home-Made Money” to AARP Fulfillment D-12894, 601 E St. N.W., Washington D.C. 20049. Delivery takes six to eight weeks. For faster service, you can call the AARP’s reverse mortgage hot line at (202) 434-6066.
401(k) Withdrawal Tax Must Be Paid in 1 Year
Q: Last summer I withdrew a large amount of money from my 401(k) plan to make a down payment on a house. Do I have to pay taxes on this all at once in one year or can I spread it out over several years? Also, my son will apply for financial aid at college this year. Will the money I withdrew from the 401(k) be included in my income and therefore count against his chances of getting student aid? --K. J. T.
A: You must report the 401(k) account withdrawal on your 1991 tax returns and pay taxes, plus a 10% penalty if you are under age 59 1/2, in a single year. You may not spread out the tax payments or engage in any other sort of “income averaging” on the withdrawal.
Because the withdrawal will be listed among your 1991 income on your federal and state tax returns, your son’s student aid application will certainly reflect this additional income. To minimize hurting his chances for student aid, you would be wise to include a note explaining that your income was abnormally high for 1991 because you made a withdrawal from your 401(k) account to purchase a house. You might even want to include a copy of your 1990 tax return as well to give a more accurate picture of your financial situation.
Depreciated Assets Shouldn’t Be Donated
Q: Many years ago I purchased 100 shares of Continental Air for $15 each. That stock is now worth about $1.50. What can I do with them? They pay no dividends. To sell them would result in a higher brokerage fee than the sale would generate. If I give them away, can I claim a deduction of $1,500, or would I show it as a gift with a deduction of just $150? --S.L.K.
A: Never, never give away depreciated assets to charity. Tax deductions for charitable contributions may be claimed only for the fair market value of what you are donating, not what you paid for it.
So if you give the Continental Air shares away, you would be entitled to a deduction of just $150.
Instead, if you were to sell the shares and get nothing after the payment of broker’s fees, you would be entitled to a $1,500 investment loss deduction. If you sold the shares and received $100 in return and gave the $100 to charity, you would be entitled to a $1,400 investment loss deduction and a $100 charitable contribution deduction.
Loss on Investment Can Cut Home-Sale Tax
Q: I have an investment loss of about $110,000 that I have been gradually deducting from my income taxes at the rate of $3,000 per year. I am thinking of selling my house and am wondering if I may offset my gain with the remainder of the $110,000. May I? --D.G.
A: Yes. If you purchase a replacement house that costs less than the adjusted sales price of your current residence--incurring a potential taxable gain--you may offset that gain with your investment losses.
By applying your investment losses to your profit now, you are preserving your right to use the $125,000 one-time exclusion of home sale profits for a later sale.
