Bus Shelter Can Still Be Tax Shelter
Q: I invested $10,000 in a bus shelter purchase and lease-back deal three years ago. I received lease payments in 1992 and reported them as income. I received seven payments in 1993 before the company became the target of a Securities and Exchange Commission investigation and ceased making payments. How do I handle the payments I received in 1993, and what do I do with the rest of my investment?-- J.V.L .
A: For 1993, you should report the lease payments you received as income and continue depreciating the structure as you no doubt started to do. You may not, as you might want, consider the lease payments you have received to be a return of your initial capital, leaving you to write off the remaining un-reimbursed, undepreciated amount as an investment loss.
How can you write off your investment? Our experts say you must abandon it; that is, stop all efforts to lease or find advertising tenants for the bus shelter. Should you do so, you are entitled to write off only the undepreciated amount of the bus shelter’s value.
Loss Can Be Tax Gain in Sale of Real Estate
Q: I purchased a rental house several years ago that I now must sell at a substantial loss. How do I account for my losses on my income taxes? Is this loss treated like any other capital loss?-- D.A.M .
A: Losses on the sale of rental properties are not treated like other capital losses. For reasons probably best known to Congress and the real estate lobby, taxpayers with real estate investment losses are entitled to more generous write-offs.
Perhaps the greatest is the taxpayer’s ability to write real estate investment losses off against the full extent of ordinary income. If your losses exceed your annual income, you can carry the excess back three years, or forward one year to recoup the balance of the deduction against your ordinary income for the period.
Compare this to the rules governing, say, a loss in the stock market. That loss must be written off first against gains on similar investments. Any excess after that can be written off against $3,000 of ordinary income. The loss can be carried forward, but only at the rate of $3,000 a year.
Appraising Your Home Retroactively
Q: My wife died two years ago. I did not know at the time that I should have gotten our home reappraised to its value as of her death to determine its stepped-up value. Is it too late?-- R.H .
A: You are still entitled to establish the value of your community property assets as of your wife’s date of death. Further, you should not have much difficulty determining the value of your home as of that date. The easiest way to do this is to ask a trusted real estate professional who specializes in your neighborhood for a list of sales of comparable properties around that time. Or you can search the files at the recorder’s office for your county.
Of course, the above advice assumes that you filed the required estate-tax return following your wife’s death. Normally, completing the return would have required you to set the value of your wife’s assets in order to determine whether any estate taxes were due. Did you do this? If not, you face a potentially bigger problem than merely establishing the value of your home. In this case, see your attorney or accountant immediately.
If no estate taxes are due because your wife’s assets were worth less than $600,000 as of her death, you should have little trouble filing a late return. However, if you do owe taxes, your situation is stickier and you will need some professional assistance.
Finally, as you know, the value of California real estate has declined--markedly in some cases--over the last two years. If your tax basis is reset at an amount higher than what you can currently sell your house for, you are not entitled to claim a loss on the sale. Any losses--paper or otherwise--are not deductible on the sale of a personal residence.
See Line 3, Section 1, for Tax-Free Income
Q: Where on the tax form is tax-free income subtracted from taxable income?
E.J.D .
A: If your total interest or your total dividends received during the year exceeded $400, you must complete the relevant sections of Schedule B of the tax form. Part I deals with interest; Part II is for dividends. In these sections you are to list all your interest and dividend payments. But on Line 3 of Part I you list the tax-free interest for subtraction from the total. On Line 8 of Part II, you subtract your tax-free dividends. The results of these computations are entered on the appropriate lines of Form 1040.
How to Withdraw From Your IRA
Q: I turned age 70 this year and must begin mandatory withdrawals from my IRA. I understand there are two acceptable methods for calculating the amount to be disbursed: “recalculation” and “term certain.” Which is easier? I don’t want to saddle my beneficiary, my sister, with an extra burden. If I use the term-certain method, how much will I have to take each year?-- E.B .
A: The term-certain method is easier since it does not entail a recalculation of the amount to be taken every year. According to the IRS, you can use the “single life expectancy” system for determining the minimum withdrawal you would have to make each year under the term-certain method. According to unisex life expectancy tables used by the IRS, a 70-year-old taxpayer would be required to take a minimum IRA distribution equal to one-sixteenth of the account every year.
