Your Money : Obey IRS and ‘Wash Sale’ Can Work
Q: I have invested a substantial amount in utility stocks, some of which are now selling for less than I paid for them. May I sell them, take the loss and then repurchase shares in the same company to restore my portfolio? Despite their current prices, I believe in their long-term outlook and like the dividends they pay.-- B.J.L .
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A: Your strategy can work if you obey the strict rules the Internal Revenue Service has established to regulate so-called wash sales. If you sell shares at a loss, the IRS requires that you not purchase new shares in that company within 30 days of the sale, before or after. If you do, the IRS will disallow your loss deduction.
If you can live with the IRS rules, your plan can be a sound one. However, before you sell, be sure that the shares you want to repurchase are likely to be selling in the price range you want. Clearly, utility stocks have remained at or near their 52-week lows in recent months largely because they are interest-rate-sensitive and will drop at the first hint that rates are rising. If you think you have a 30-day window ahead, you can sell now and repurchase next month. As with most tax-avoidance schemes, this strategy works best for those in the highest tax brackets.
Also, remember that capital losses may offset capital gains up to just $3,000 of ordinary income per year. Finally, before proceeding with your plan, pencil it all out--including the brokerage commissions you will have to pay to buy and repurchase your shares. You should be absolutely sure that your plan is worth the effort.
Take on Mother’s Mortgage Payments
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Q: My mother owns a house valued at $230,000 with a mortgage balance of about $100,000. She earns about $20,000 a year. I am single and earn about $50,000 a year, most of which ends up in Uncle Sam’s pockets. My mother would like to give me the house and let me pay the mortgage and claim the deduction. She would continue to live there. Can this strategy work?-- B.W.
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A: You are not legally entitled to claim the mortgage interest deduction from your mother’s home unless paying the mortgage is your responsibility. So the question is how to put the house in your name without triggering undesirable tax consequences for either of you. In addition, you must make sure that once you are paying the mortgage, you treat your interest in the home in such a fashion that the mortgage interest qualifies as a legitimate tax deduction.
Howard Gordon, a Palm Springs certified public accountant, suggests that your mother sell you half the home for $115,000. As payment, you would give your mother $15,000 and assume the $100,000 mortgage. If you move into the house, your mortgage interest would qualify as a deduction since the home is your primary residence. If you do not move in, you should consider the home your second residence because mortgage interest on second homes is also deductible.
Your mother would be liable for taxes on the gain from the sale of half the home, which would be computed by deducting her taxable basis from the $115,000 she realized from the sale. However, if she is eligible and so desires, she could use her onetime, $125,000 exclusion on the sale profit, thus wiping out any tax obligation.
Of course, your mother could simply give you the house as a gift. But Gordon doesn’t recommend this strategy for a variety of reasons. For starters, if it were simply given to you, the home would carry its original tax basis and thus expose you to a considerable tax obligation upon its sale. In addition, depending on the extent of your mother’s assets, the gift could complicate your mother’s estate planning efforts.
Enrolling to Reinvest Your Stock Dividends
Q: I own shares in American Telephone & Telegraph that are held by my broker. May I participate in AT&T;’s dividend reinvestment program? If so, how do I go about enrolling?-- A.R.R .
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A: Your first step should be to contact your broker and have your shares issued directly to you. Unless the shares are held in your name, you cannot enroll in the dividend reinvestment plan. Once you have received your certificate of ownership, contact AT&T;’s transfer agent, First Chicago Trust, at (800) 348-8288. Representatives there will be able to help you enroll in the reinvestment program.
Once you join, your quarterly dividends will automatically be used to purchase additional shares of AT&T;’s stock at the stock’s market price at the time of the dividend payment. Although you do not receive any cash, those dividend “payments” are considered taxable income to you and must be reported on your income tax filing.
The price at which your shares are purchased through the plan becomes your tax basis in the stock. The shares purchased through the plan are held by the company and may be sold by notifying the company of your intent.
By the way, if you choose, you may also purchase additional shares in AT&T;, the nation’s most widely held stock, directly from the company once the initial shares are issued in your name.
Readers who want to join a dividend reinvestment program with other companies--or find out if a company offers one--should contact the company’s investor relations department for enrollment information.
For a full listing of companies offering dividend reinvestment plans, as well as a list of those offering discounts and optional cash purchases, consult the “Directory of Companies Offering Dividend Reinvestment Plans.” This book might be available in your local library or from your stockbroker. Or you may purchase it directly from the publisher: Evergreen Enterprises, P.O. Box 763, Laurel, MD 20725-0763. The price is $30.95 with postage and handling.
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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles CA 90053.
