Question: The state recently acquired a quarter-acre strip of frontage from my five-acre residential property in order to make road improvements. Frontage is generally more valuable than other acreage. Is there a more equitable way to calculate the cost for capital gain than simply taking a quarter of the per-acre cost?
Answer: IRS Publication 17 describes a situation just like yours. The example used to make it quite clear that the cost is to be allocated to the severed property on a proportional basis.
You should recognize that you haven't actually lost frontage. By taking a strip across the front of your property, the frontage is still there -- just moved back a few feet from where it was.
If access to the road has been blocked, or use of the property as a residence has been restricted in any way, then you may have cause for a higher cost basis. The rationale would be that the lost strip of property had special characteristics that justified a higher value than the rest of the property.
To establish such a value, you would probably have to obtain a qualified appraisal of the value of the property before and after the severance.
Then calculate the ratio of the decrease in value to the preserverance total value, and apply that ratio to the total original cost of the five acres.
Even if you went through all that, there is no assurance that the IRS would accept your reasoning. However, your case would be considerably strengthened if you had been awarded severance damages in addition to the condemnation award.
Q: Each year, as a gift for our grandchild, my wife and I have purchased a certificate of deposit, to mature annually after he enters college. To preserve what is intended as a pleasant surprise, we have said nothing to either grandchild or his parents. With this year's gift, the interest income will exceed $1,000. Will he have to be told so he can file a tax return? Or is there a better way -- like deferred-interest Series EE bonds?
A: Under the circumstances you describe, you really have no choice. Since he will have more than $1,000 in unearned income, he will have to file a personal income return for 1980.
(You might squeak by in 1981. One of the tax reduction proposals being discussed is an increase in the personal exemption. Since this figure is the filing trigger, pressumably the floor for requiring a return will go up also.)
The use of Series EE bonds is a possible solution. The accruing interest would be taxable in the year the bonds are redeemed. (Buy bonds in the name of the child, not in your name with the child as co-owner.) But the yield is disappointingly low.
There is an alternative. You could establish a trust for the child, naming yourself as trustee. Assuming the income is retained in the trust and not distributed to your grandson until he starts college, he would have no liability for a tax return until then.
Instead, as trustee you would file an annual return for the trust, using IRS Forum 1041, on which you would report (and pay tax on) the interest for the year.
If you go this route, the trust instrument should be prepared by an attorney to be sure it meets all legal requirements. This is a somewhat more cumbersome method than buying U.S. savings bonds but, by providing more flexibility, should permit a higher investment return.
TAX TIP: It looks like we'll have a general tax cut for 1981 regardless of who wins the November election. It makes sense, then, to plan tax-related financial actions to take advantage of that probability.
If possible, defer the receipt of income until 1981, when tax rates are likely to be lower. For the same reason, accelerate the payment of deductible expenses to get them into your 1980 return.
Capital losses will probably save you more tax money in 1980 than in 1981; but capital gains may cost you less if reported on your 1981 tax return. (It may not pay to defer taking gains, however, to the extent you have offsetting losses.)
These are not rules to be followed blindly. You must consider the impact of probable tax legislation on your particular circumstances. This is simply a reminder that the shape of next year's tax rules is an important consideration in planning your year-end tax strategy.