Condo Owner Faces Deadline on Taxes

QUESTION: At the beginning of the year I owned two condos; one was a personal residence, the other was a rental. I sold my residence, and when my rental became vacant at about the same time, I moved into it. I spent the next few months making repairs and upgrades to the rental condo and have been living there since as a matter of convenience.

I plan eventually to do a tax-deferred exchange with this condo. But I want to know whether my ability to treat this condo as investment property is in jeopardy if I continue to live here. Do I have to continue actively seeking a tenant? What if I just start treating the rental as my residence and roll my gain from the sale of the first condo into it?--W. L.

ANSWER: Your situation is getting complicated and, according to our advisers, the longer you continue living where you are, the greater the likelihood of your losing virtually every tax advantage available to you.

For starters, you may not simply decide that your rental condo is your replacement residence and defer your gain from the sale by saying that your investment in the rental is the rollover of your profits from the sale of your residence condo. You already owned the rental condo; you haven’t reinvested your sale proceeds at all. Further, it seems your intent from the outset was to treat this unit as an investment property. (If you had intended all along to treat the second condo as a residence, and had rented it only temporarily before moving into it, the IRS does allow you to consider it a replacement residence. However, you would have had to purchase it no more than two years before selling your other residence.)

Whatever the situation, you have two years from the closing of escrow on the sale of your first residence to move into a replacement home that is of equal or greater value than the home you sold. The clock is ticking, and once time runs out you stand to be taxed on whatever gain you realized from the sale of the condo.

If you continue living in your rental condo, it is possible that the IRS will determine that it is no longer a rental property. If your rental unit loses its status as an investment you will lose the chance to participate in a tax-deferred exchange with it. And that would be both unwise and unfortunate for you, especially if you expect to realize a big profit from the sale of the rental condo.

Sounds as if it’s time for you to get moving.

Rolling Over a Pension Fund

Q: I will be quitting my job soon and will be receiving several thousand shares of company stock as my pension distribution. I intend to sell the shares and roll over the proceeds into some mutual funds. But exactly how much can I roll over in this manner? Would it be the value of the stock on the distribution date, or the actual net proceeds that I receive from the sale of the shares? Also, may I pay the brokerage fees from my own funds and roll over the gross proceeds from the sale?--A. J. M.

A: First of all, we’re assuming that you intend to roll over the proceeds from your stock sale into an individual retirement account that will invest in mutual funds. Unless this is your intention, your proceeds will be taxable. And you have just 60 days to open the IRA account after selling the shares.

The law allows you to roll over the entire proceeds from the stock sale into a tax-sheltered IRA, even if the stock appreciates between the time you receive it and finally sell it. So you may shelter the appreciation as well as the principal. If the stock should decline in value between the time you receive it and sell it, you are allowed to open an IRA in an amount equal to the value of the shares on the day you received them. The law also allows you to pay the brokerage fees from your own pocket so the full amount of the pension can be put into a tax-sheltered account.

IRA Rules May Mean Distribution

Q: I am age 70 1/2 and taking mandatory distributions from my individual retirement accounts. But I have a big problem with one of my 12 accounts. Last April, this account matured and I put the funds into a 182-day time deposit. When the deposit matured in October, I put the entire proceeds, which amounted to $9,500 including interest from the 182-day investment, into an 18-month IRA account at the same bank. Now the bank tells me that they will report this $9,500 as a distribution to me this year. I have already taken the distribution I want for this year and have made plans for my distribution in 1990. What can I do? The bank’s handling of this does not seem right. I did not withdraw any of the money.--T. D.

A: On the surface, your arguments seem plausible. However, you haven’t told us one very crucial bit of information. And according to our advisers, this may be the key issue in the bank’s determination.

What name did you use when you purchased the 182-day time deposit? Was it your own name, or the name of your IRA trust? If you used your own name, then the bank’s determination is correct. You are allowed to withdraw funds from your IRA, but they must be reinvested in an IRA within 60 days to avoid the move being considered a withdrawal. You exceeded the limit by investing the funds in a 182-day account.

If this is the case, your taxing experience points out how carefully we all must pay attention to the regulations governing individual retirement accounts.

However, if the 182-day time deposit was made in the name of your IRA, then you should ask your bank for a further explanation for their determination. Our advisers cannot think of any reason why your moves should have triggered their conclusion. Will you let us know how this sorts out?

Wife’s Sale of Stock to Husband Is Taxable

Q: I plan on selling some shares of stock to my husband. I purchased some of these shares before our marriage 10 years ago, and some I purchased or acquired through stock splits during our marriage. What are the tax consequences of this transaction between husband and wife?--M. J. W.

A: If you’re selling the shares to your husband at a profit, the consequences are the same as they would be if you sold to anyone else: You will have a reportable gain that is subject to taxation. However, if you’re selling at a loss, you cannot claim it as a tax deduction because you are selling to a member of your family.

We’re not trying to be rude, but our advisers do wonder why you are bothering to sell the shares. Perhaps you might consider making them a gift, or even exchanging assets of equal value if you are trying to even up your pre- and post-marital holdings.