When selling a vacation home, here are the taxes to expect
Dear Liz: I am one-third owner of a vacation house. My siblings own the other two-thirds. We inherited the house from a parent about 10 years ago. I want to sell my third to my siblings, who are willing and able to buy it. Can I do anything to avoid capital gains? Would it make a difference if I sell my interest over several years?
Answer: Vacation homes aren’t eligible for the tax break that allows people to exclude up to $250,000 in capital gains from their income when they sell their primary home. If the property was used full time as a vacation or second home, rather than as a rental, it’s also not eligible to be swapped for another property in a 1031 exchange. (These exchanges allow investors to defer capital gains on real estate investment properties.)
Selling your share of the property over time won’t eliminate the capital gain, but it would spread out the tax bill. Discuss your options with a tax pro to see which approach makes the most sense.
Don’t close that credit card
Dear Liz: I’m debt free with a comfortable income and excellent credit. I just got a new cash-back credit card. I have three other credit cards, including one affiliated with a retail chain that I no longer use. Should I close the retail chain card so I only have three cards? Should I have fewer?
Answer: More is often better when it comes to your credit scores. The scoring formulas may temporarily drop a few points when you apply for a new card, but having at least four active credit accounts can help you achieve and keep high scores.
The formulas won’t punish you for having too many accounts or too much available credit. You could get dinged, though, if you use too much of that credit at one time. To avoid that, try to keep your balance on each card below 10% of its available limit.
A surprisingly low rate promised on a home equity line of credit is probably just a “teaser” rate, which eventually could go much higher.
Whether to close elderly mom’s CDs
Dear Liz: I have the power of attorney for my 92-year-old mother, who has dementia. She has numerous financial accounts including money market, checking and savings accounts and certificates of deposit. When she passes, would it be easier to settle her estate if I start closing her CDs now and put that money into, say, her money market? I am the sole beneficiary for all of this.
Answer: If your mom has multiple accounts at different institutions, then consolidating those accounts now can save time and hassle later. You’ll want to review the rules for FDIC insurance, though, to make sure her accounts would remain adequately covered.
There’s probably less urgency if all her accounts are already at the same institution and under FDIC limits. Closing CDs prematurely could mean losing some interest, which may not make sense unless she urgently needs the money.
If you haven’t already, consider checking in with an estate planning attorney who can give you suggestions about what you can do now to ease the transition later.
The 50/30/20 budget was popularized by Sen. Elizabeth Warren and her daughter Amelia Warren Tyagi in their book, “All Your Worth: The Ultimate Lifetime Money Plan.”
How delayed Social Security retirement credits work
Dear Liz: I just got off the phone with the Social Security folks and they told me the 8% delayed retirement credit is based on your benefit at full retirement age, rather than an 8% increase every year based on the previous year’s amount. So, if my full retirement age benefit was $3,000, my benefit increases $240 each year, not $240 the first year and $259 the second year and $279.94 the third year. Is that your understanding?
Answer: Yes. Delayed retirement credits don’t compound. If there are three years between your full retirement age and age 70, when your benefits max out, you will get 24% more than if you had applied for Social Security at your full retirement age.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
