Apr 20

Sometimes an example of a financial mistake is an easier way to deliver an important bit of advice than the usual soapbox lecture. Given the recent changes back to old style of estate taxes and the step up in basis the beneficiary enjoys, it seems timely to share this story with my readers.
The house is a four family, a small apartment house, purchased in the early 1940s when $4000 went a bit further than it does today. Owned by the grandmother, the four apartments are each occupied by family members. Well before the grandmother passed away, she quit-claims the property half to her son, the other half to her two daughters. This was the first mistake, in effect, the house was gifted, no paperwork filed, and no stepped up basis on her passing. To make matters worse, the son had since passed on, but not before transferring his half share to his daughter. His surviving spouse and daughter continue to occupy half the house, i.e. Two of the four apartments. The real issue has yet to surface. When the mom (surviving spouse) passes and the daughter wishes to sell her half along with the other relatives, there was never a step up in basis, and while she may be able to take the $250,000 exclusion on her 1/4 value she lived in, the quarter occupied by her mom is nearly all a capital gain. The current building value is about $800,000, so this woman is looking at a potential near $30,000 tax bill. Three chances to avoid it, all missed due to lack of knowledge and lack of good counsel.

As I was getting ready to publish this, I heard back from a fellow newsgroup reader;

It’s not as bad as it seems.  If the woman still lives there (or could) when she dies, §2036 says, “The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—
“(1) the possession or enjoyment of, or the right to the income from, the property, or
“(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.”
Then under §1014 says that a recipient gets a stepped up basis “if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter
11 of subtitle B….”

It was not the smartest thing to do, but it doesn’t have to be a problem, either.

So, in the end, it’s a matter for the tax guy for the beneficiary of the house. Hopefully he has his facts straight.

written by Joe \\ tags: , ,

Sep 26

We start this week with the ongoing coverage Kay Bell has been providing regarding the expiring tax cuts. One of her posts this week was Effect of expiring tax cuts on the rich. As you may know, if congress doesn’t act, the Bush tax cuts expire as this year ends. The expiration will impact all of us.

Craig Ford alerted us to the ING Direct 1% Cash Back Debit Card Promotion. Not bad for a debit card. He also shared a quote from a reader who unsubscribed “YOU ARE BORING AS MUD DRYNG !!!,,,,DUDE!” Wow. That tells me more about the reader than about my fellow blogger. Me, I once asked my wife if she read me now and then. She answered, “Read you? I never have a clue what you’re writing about.” Hmm, not exactly true, I know I get dry and technical sometimes, hopefully not too often.

Neal Frankle asks Rollover to Roth 401k. A Good Idea? I was afraid this would be more Roth Mania, but not from Neal. He offers a level headed approach to this topic much in line with my own.

This week, The Oblivious Investor discussed Deducting an IRA Loss (Roth or Traditional). Turns out you already deducted (most likely) the deposits to a traditional IRA, so any loss there cannot be deducted. For an IRA that wasn’t pretax or a Roth, there are some details that need to be considered. All in all, this won’t apply to too many people but info that’s good to know.

Next, Len Penzo shares 21 Reasons Why Corner Lots Are For Suckers. I’ve not given this any thought in, well, forever, as I moved out of the city after I graduated college, and lived in the ‘burbs ever since. But for you city folk, this is actually a well thought out list of reasons to avoid corner lots when buying a house.

And last this week, I’d like to share Canadian Finance Blog’s Dying Without A Will. Good to know that Canadian laws regarding wills is pretty similar to the US. The list is very similar to one I’d write for my local readers. A nice guest post on CFB by Jim Yih.

written by Joe \\ tags: , , , ,