Your Move Starts the Clock Ticking for the Reinvestment of Profit from Home Sale
Q. I sold my house in June for $225,000. The previous July, I purchased a duplex for $320,000; I live in one unit and rent the other. I understand the value of my unit does not equal the $225,000 I must reinvest in a primary residence in order to defer taxes on my accumulated profits. However, I understand the value of any permanent improvements I make to my unit can increase that value. The question I have is, what is the deadline for making these improvements? In other words, when did the 24-month clock begin ticking? With the purchase of the duplex or the sale of my house?
--S.R.
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A. To defer taxation on your accumulated gains, the law requires that you reinvest in a new principal residence within 24 months, running either before or after, of the date you moved out of your original principal residence. From the information you provided, we cannot tell when that event occurred. Did you move into the duplex unit upon purchasing it? Or did you move in following the sale of the house? The 24-month clock began ticking as of that moving date.
If you moved into the duplex after selling the house, your duplex purchase still counts toward your replacement residence expenditure. And you still have 24 months after moving out of your house to count any permanent improvements you make to your duplex toward your total new residence investment. In essence, the 24-month period runs both forward and backward, giving you as many as 48 months to make the reinvestment.
A Bankruptcy Book to Read Before Filing
Q. I am considering filing for bankruptcy. How should I proceed? Is there a book I can use?
--M.B.
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A. Personal bankruptcies are a time-honored way for overextended debtors to wipe the slate clean. However, they carry a considerable downside: a social stigma and a significant black mark on your credit records.
Perhaps the best discussion of the issues and processes surrounding bankruptcy filings is in the book “How to File for Bankruptcy,” published by Nolo Press in Berkeley. The book contains all the work sheets you need to assess whether you should file for bankruptcy protection and what type of protection you should seek. Furthermore, the book offers all the forms you need to handle the filing yourself.
The book is available in most libraries and bookstores, or it can be ordered directly from Nolo Press by calling (800) 992-6656 in California.
Employer Delays 401(k) Recordings
Q. I recently learned that my company has been delaying the recording of my contributions to my 401(k) plan. What is the law? Is there any way I can file a complaint about how my employer is handling these accounts?
--O.F.
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A. Section 2510.3-102 of the Department of Labor regulations requires employers to credit employee contributions to pension plans on the “earliest day” those deductions can be “reasonably segregated from the employer’s general assets.”
The regulation further stipulates that this period must not exceed 90 days from the time the money is withheld from the employee’s paycheck.
Obviously, the intent of the regulation is to ensure that employees are credited as soon as possible with any interest their pension contributions earn and to keep employers from taking unfair advantage of their employees by keeping a portion of those interest-earning contributions for themselves.
Workers who suspect that their 401(k) or other pension accounts are being mishandled by their employers should complain directly to the Labor Department’s Pension and Welfare Benefits Administration.
In Southern California, workers can write to David Ganz, area director of the Pension and Welfare Benefits Administration, 790 E. Colorado Blvd., Suite 514, Pasadena, CA 91101. Please note: This office is set up to investigate only potential abuses. It cannot handle benefits disputes or other pension issues.
Figuring Taxable Gain on Sale of Home
Q. How do I calculate my taxable gain on a home sale when using the $125,000 exemption? I sold my house for $450,000. My basis in it was $125,000.
--T.M.
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A. This calculation is among the most misunderstood by taxpayers. Unfortunately, many are shocked to discover that the formula is not what they had assumed and that the correct calculation produces a higher taxable gain than they had assumed.
The first step is to subtract the $125,000 exclusion from the net sales proceeds. This leaves $325,000. It is at this point that many taxpayers become confused. The Internal Revenue Service allows you to deduct the larger of either your taxable basis or the purchase price of the new home. You may not, as many taxpayers erroneously assume, deduct both amounts.
If you were to purchase a new home for $325,000 you would not have any taxable gain. However, if you invest less than that amount, you would be liable for taxes on the difference between your actual replacement home purchase price and the $325,000. Sorry, I know this is probably not the answer you wanted to read.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to carla.lazzareschi@latimes.com
