Separate-Debts Accord Can’t Be Grandfathered

Q: I am married and live in a community property state. I have kept as separate property all the credit cards and lending agreements I had while I was single. My husband and I have only one joint credit agreement, a $30,000 loan. I would like to be exempt from the community property laws, and last month I had an attorney draft a sort of “post-nuptial agreement� stating that my husband and I agree to be completely separate financially. In the agreement, my husband accepted fully the $30,000 joint debt as his sole debt.

Does the lender have to accept this arrangement? What about the separation of all our other assets and liabilities--can those be exempt from community property? I am afraid of my husband’s mounting debts. --D. L. F.

A: Although you don’t explicitly say so, it would appear that you are preparing for either a divorce or personal bankruptcy filing by your husband--or both. Thinking ahead is often quite wise; however, the measures you take can only apply to what’s ahead--not to what has already taken place.

According to our advisers, you and your husband can agree to exempt yourselves from the state’s community property laws.

However, your agreement will not necessarily affect the $30,000 loan or any other debts that were issued to you and your husband on the basis of your joint credit unless the lender agrees to change the terms of the loan. How fair is it to tell a lender unilaterally that the loan it made with a married couple has since been assigned to one of the parties and that the other party is no longer responsible? Even in a divorce, when the debts are divided between spouses, lenders are allowed to go after the other spouse if the one assigned the debt fails to make the payments.

Weighing Whether to Keep a Rental House

Q: My husband and I each owned a house before we married last year and are now trying to decide whether we should continue renting out one or selling it. The house we are renting has a mortgage of about $25,000 at an interest rate of 8.5%. Our monthly payment is $343, and our annual interest and tax payments are about $3,000. The house is appraised at about $80,000. We are renting it out for $650 per month but are paying taxes of $1,200 on our profits.

What should we do with it? Sell it? Continue renting it and pay the taxes? Maybe there is another option. --S. Y.

A: Assuming that you have no pressing need for the cash from the sale and are comfortable with being landlords, let’s turn to a quick mathematical analysis of your situation.

If you were to sell the house for $80,000, you would have a pretax gain of roughly $55,000, and assuming a combined state and federal tax rate of about 33%, you would have about $37,000. If you invested that in a tax-free mutual fund paying 4%, your annual income would be about $1,480. Now, if you keep the house and continue to rent it, your annual after-tax income is roughly $3,650 ($7,800 annual income minus $3,000 mortgage and property taxes and $1,200 income taxes). Furthermore, depending on the real estate market, your investment may still be appreciating in value.

If you want the cash from the rental home, there is another alternative to selling the house: refinancing it. Let’s say you get a new, 30-year, $64,000 mortgage on the house at 9.5%.Your monthly payment would be $538, leaving you something of a cushion to pay your taxes, insurance and remaining expenses. After repaying the $25,000 still owed on your existing mortgage, you would have $39,000 left to invest or use as you wish.

Late Home Sale to Limit Capital-Gains Break

Q: I need some help figuring the capital gains tax I owe on the sale of a rental home. The house, bought in 1981, was originally my residence. Before buying this home, I had owned several others and had deferred my gains when I sold them. I was laid off in 1986 and put the home on the market. It didn’t sell. Finally, I converted it to a rental. In 1988, newly employed, I purchased another home in which to live. This year my house finally sold. May I apply the deferred gains from houses purchased prior to 1981 to the basis on the house I bought in 1988? How should I calculate the basis on the house that just sold? If I have a huge taxable gain, it would wipe out my old-age nest egg. --C.G.M.

A: Unfortunately, you are stuck in one of the worst possible of positions. Not only can you not apply the deferred gains from your prior residences to your current home, you must deduct those gains from your gain on the house you just sold.

You may not apply those earlier gains to your current home because that home does not meet the definition of a replacement residence; it was not purchased within 24 months of the sale of the previous residence. Those gains must be applied to the house you just sold, reducing whatever profit you might have finally realized from its sale.

The only potential escape you have from this double whammy tax is to enter into a so-called 1031 exchange with the proceeds from your recently sold rental house. You have 45 days from its sale to identify a replacement piece of investment real estate and an additional 180 days after than in which to complete its purchase.

Perhaps if you move quickly, you can get in under the deadline.