Detouring Around Tax Bite on a Restored Car
Q: Nearly 25 years ago I bought an old car for $750 and spent my spare time and money over the next 2 1/2 decades lovingly restoring it. Now I have been offered $85,000 for the car. Must I pay taxes on the amount I receive? Could I trade the car for stock or real estate to get out of my tax responsibility? --R.W.
A: You are liable for taxes on the profit you receive on the sale. To figure your tax bill, you should add to the basic $750 purchase price any and all expenses you incurred while restoring the vehicle.
Legitimate expenses would include auto parts, storage costs, license fees, annual insurance premiums and labor costs for which you paid another person. (You may not include a value for your own labor on the car.)
Your tax bite would be lowered if the auto sale is part of an ongoing vehicle restoration hobby of yours that has generated losses in the last three years or might generate losses over the next two years.
If you have losses from this hobby, you are allowed to amend your tax filings for the previous three years to show those losses. Then you could deduct those losses from the gain you receive on the $85,000. You are also allowed to deduct losses incurred from the hobby over the next two years from the gain on this sale.
To avoid the tax bite entirely at this time, you could exchange the car, but only for another vehicle--not for stocks or real estate. This transaction would involve what is known as a “1031” exchange, so named because of the code section of IRS law that details it.
The law allows exchanges only of “like kinds” of property: real estate for real estate and vehicles for vehicles, for example. However, an exchange only delays the tax bill--it does not waive it.
Keeping Tabs on Mortgage Prepayment
Q: You recently talked about repaying a mortgage. I have read that you have to be careful that any money you prepay is correctly credited by the bank. What do I need to do to make sure this is done? --J.R.
A: Many lenders provide an area on their mortgage payment coupons for homeowners to indicate if they are prepaying a portion of their loan principal. If this is true in your case, you should mark the appropriate section and note the amount of principal you are prepaying. If there is no special area, then check with your lender to be sure that prepayments are accepted.
Before making your first prepayment, you should ask your lender for the amount of your outstanding loan balance. Make note of it. Then carefully record the amounts and dates of your prepayments. At the end of the year, your lender should send you an accounting of how much you have paid in mortgage interest and principal over the previous 12 months. Double check the lender’s records against your own and, if you have questions, don’t hesitate to get a satisfactory answer from your lender.
Basically, and without getting into complicated amortization schedules, by the end of the year your principal should be reduced by slightly more than the amount it dropped during the prior year--plus the amount of your prepayments.
Stock’s Tax Basis Is Easy to Figure
Q: I am trying to figure out how to determine my tax basis in some stock I have gradually acquired over the last 33 years. I bought the original 49 shares for $2,900. Over the years, I used the $20,400 in dividends, on which I paid income taxes each year, to buy additional shares. Now I own 1,500 shares. --M.Y.L.
A: Your tax basis is $15.53 per share.
We arrived at this by adding your original investment ($2,900) to the reinvested taxable dividends ($20,400) and dividing the $23,300 sum--which in your total investment in the stock--by the 1,500 shares you hold.
This formula will work for anyone else trying to calculate the tax basis of shares acquired through taxable dividend reinvestment programs.
Real Estate Exemption: Double Your Pleasure
Q: I am not sure how the $125,000 one-time exemption of real estate profits works. My father and I are co-owners of the home in which we both live. We are both over age 55. Are we each entitled to a $125,000 deduction? --R.L. Jr.
A: Yes, you are both entitled to a $125,000 exemption on your shares of the profit when the home is sold. With the notable exception of married couples, any two or more homeowners over age 55 who have lived in a home as their principal residence for three of the last five years are entitled to the exemption. Married couples are entitled to only a single $125,000 exemption.
Ex-Spouse and Social Security
Q: I am turning 65 this year and would like to apply for Social Security as a divorced spouse. But I have been told that I do not qualify because my ex-spouse is not yet 62. Is this true? I thought that the wage earner did not have to be collecting (benefits) for a divorced spouse to qualify. Am I getting the correct information? --J.D.
A: Yes, you were correctly advised. In order for you to begin collecting Social Security on your ex-husband’s account, he must be at least 62. He doesn’t have to begin collecting benefits, however; he just has to have reached that age. If the primary wage-earning ex-spouse dies before turning 62, then the divorced spouse may collect benefits as a “surviving divorced spouse.”
