Avoiding Taxes--and a Stubborn Ex-Husband

Q: What kind of capital gains tax consequences will I face if I exchange my present apartment units for another set of units in another state? My ex-husband and I own a five-unit complex here. He lives in one unit, I live in another, one is rented and two are vacant because that is the way this stubborn guy wants it. The entire building is worth $600,000. I want to get my share and get out of this situation which has been going on now for 13 years. --A.R.

A: If you manage to exchange your property for another in another state, you will be able to defer any taxes you owe on the appreciation of the apartment complex here. However, whether you will actually be able to pull off a tax-deferred exchange is quite another matter. Under the restrictive Internal Revenue Service guidelines, only the rental units (not the unit you are living in) can qualify for a Section 1031 exchange. You could buy another principal residence and roll over the gain apportioned to your own apartment to avoid tax on that, but it would have to be a separate transaction.

Another issue to consider is how you and your ex-husband hold title to these apartments. If you are partners, then you would have to jointly invest the proceeds from the apartment house sale as partners. (This would certainly defeat your goal of getting away from your ex.) However, if the property is held as tenants-in-common, you could make a deal on your own and go your separate way.

Still another matter is whether your ex-husband wants to sell his half of the complex. If he doesn’t, are you going to be able to find someone to take over just your half? It probably won’t be easy.

Whether one of you wants--or can afford--to sell out to the other is yet another question to be explored. Your best bet is to consult a attorney or certified public accountant who is thoroughly familiar with the laws governing real estate exchanges. Be careful in selecting your adviser. This is a highly specialized area of the law and a mistake could cost you a hefty tax bill.

Who Pays Taxes on Bequeathed Assets?

Q: A friend recently died and left behind stock worth $75,000 that had an original cost of $25,000. Is the $50,000 gain taxable and, if so, who should pay that tax: the executor of the estate or the beneficiary? --R.P.J.

A: Any tax levied on the stock’s appreciation would not be assessed until the shares were sold and that tax would be the responsibility of the person or entity (estate) selling the shares.

However, do not forget that bequeathed assets are valued as of the deceased’s date of death. In this case, the shares do not carry a $50,000 gain because the tax basis is stepped up from $25,000 to $75,000.

If those shares are sold for $75,000, there is no tax obligation; if they are sold for $80,000, only $5,000 would be subject to taxation.

If the shares were sold by the estate at a price above the value on the deceased’s date of death, the estate would be responsible for the taxes.

If they are sold by the heir, then it would be his responsibility to pay any owed taxes.

Fixing Value of Home Converted to Rental

Q: In a recent column you discussed how to value your home when you convert it from your principal residence to a rental, noting that the tax basis could be set at the time of conversion. My accountant is preventing me from doing this. What gives? --B.J.L.

A: The tax basis of a principal residence that is converted into a rental is the lower of either the home’s fair market value as of the date of conversion or its original cost basis. You must use the lower value.

So if you bought a home for $150,000 and converted it into a rental when it was worth $175,000 and sold it for $200,000, your taxable gain would be $50,000, not $25,000.

Remarriage Costs Her on Social Security

Q: I am 63 years old and barely scraping by on my meager Social Security. My husband isn’t old enough to draw his Social Security. However, my ex-husband, to whom I was married for 25 years, has a big Social Security check. May I claim benefits as his ex-wife? --A.B.

A: As long as you remain married to your current husband, you may not claim ex-spouse benefits. In order to draw benefits as a divorced spouse you must be unmarried. If you should divorce your current husband--or if he should die--you would be able to claim benefits on either man’s account. Presumably you would choose the larger of the two.

Property Tax Refund: Wait Till Next Time

Q: I recently won a property tax refund of $2,000 because I learned through your column that I was eligible, because of my age, for an exemption to the required Prop. 13 reappraisal of a newly purchased home. Do I have to file amended tax returns for the previous two years because I claimed those property tax deductions? --R.T.P.

A: No. Our experts recommend that you simply list the refund as miscellaneous income on your next tax filing. There is no need to file amended returns to reduce your real estate tax deductions.

EDITOR’S NOTE: The annual earnings limits for adults being declared as dependents in the 1992 tax year was incorrectly listed in last Sunday’s Money Talk column. The correct figure is $2,300.