How Co-Ops Differ From Condos
Q. What are the essential differences between a condominium and a cooperative? Are there any inherent advantages to one over the other? R.S.B .
A. The major difference between a condo and a co-op comes down to ownership. When you buy a condominium, you actually purchase the unit you will inhabit. At the same time, you either get the right to use the common areas of the complex or a fraction, or share, of that property equal to your proportionate interest in the project. When you buy into a cooperative, you are purchasing a share in a corporation that owns the building housing your unit. At the same time, you receive a long-term lease on “your” unit and the right to use the common areas of your building.
Is one any better than the other? Not really. However, you will find it more difficult to find and purchase co-ops in California. Why? Because there are fewer co-ops than condos in the state, and lenders are not as equipped or as accustomed to making loans on them. In addition, because foreclosing against delinquent cooperative buyers could be more difficult, mortgage rates are often higher for co-ops in California than for condos. Given these realities, developers naturally choose to build a project whose financing and sales will face fewer potential obstacles--so the relative dearth of co-ops in the state is perpetuated.
Statewide, there is no significant advantage to one type of housing over the other from a legal or regulatory standpoint. However, the California Assn. of Realtors advises that there can be significant distinctions in the treatment of the two in the zoning ordinances of individual communities in regard to such things as parking, rent control and open-space requirements. Before making a purchase of either type of home, you would be wise to look up the community’s applicable zoning laws.
Transferring Equity in the Family Home
Q. My parents and I jointly own a home that is held in their name only. Now I would like to get my money out of that home to purchase another for me and my family. Is there any way I can use my ownership of my parents’ home as collateral for the purchase of my own home?-- K.M.C .
A. A lender is highly unlikely to accept your proposition. After all, your name isn’t even on the deed of your parents’ home. What kind of collateral is that? Furthermore, a lender will want you to have an equity stake--that means making a down payment--in the house you are purchasing. Your best bet is to persuade your parents to cash out your investment in their house. Assuming your parents have sufficient equity in the home and the income to handle the payments, they could get the money to pay you off fairly easily through a mortgage refinancing or even a home equity loan.
Moving 401(k) Funds Without Tax Penalty
Q. When I quit my old job several years ago, I left my 401(k) account with my former employer. Now I would like to withdraw this money and manage it myself. How can I do this? Are there any restrictions as to how it can be invested?-- J.D.P .
A. Quitting a job is one of the few ways taxpayers have of gaining access to their 401(k) savings accounts before age 59 1/2 without paying an early-withdrawal penalty. However, you must understand that in order to avoid such penalties--a 10% levy on the principal by the Internal Revenue Service and a 2.5% fee due the state of California--your 401(k) funds must be transferred to an individual retirement account. Although IRAs are subject to the same early-withdrawal regulations as 401(k) accounts, taxpayers are allowed to manage IRA accounts on their own without direct or indirect involvement of an employer.
Be advised that under rules effective in January, 1993, taxpayers cashing out of a previous employer’s 401(k) or other qualified pension plan will be slapped with a 20% withholding tax on the disbursement if they take possession of the money rather than have it transferred directly to another qualified employer pension plan or individual retirement account. This means you must first decide where you want to establish your IRA account and then have your former employer transfer your 401(k) proceeds directly into your new IRA.
By the way, you would be wise to establish a separate IRA for your transferred 401(k) funds. You do not want to mingle these funds with other IRA accounts, in case you might later want to transfer the money into a 401(k) plan offered by a new employer to take advantage of the special five-year or 10-year income-averaging allowances you may be eligible to claim. (Withdrawals directly from IRA accounts do not qualify for income averaging.)
What kind of investments may you make with your self-directed IRA? Your choices are almost unlimited. You can’t put your money into collectibles, such as coins, art, precious metals or antiques. And you certainly wouldn’t want to invest in tax-free municipal bonds, because IRA earnings are already tax-free and there’s no sense in accepting lower earnings for a benefit you don’t need. Beyond that, you can deposit your IRA into virtually any type of investment you want through a brokerage firm, bank, savings and loan, credit union, insurance company or financial services company.
