Question: I sell my home at a substantial profit and take back a second mortgage. Because I have large capital losses this year I elect to report the gain in full instead of using the installment method. How do I handle the future installment payments for tax purposes?
Answer: Since you are reporting the entire gain in the year of sale, you should not split future payments of principal. There is no additional tax liability on the principal component of the mortgage payments you receive from the buyer.
But you must still report as income that part of each subsequent payment that represents interest on the second mortgage. Interest income is reportable in the year the money is received by you.
If you buy a replacement residence costing as much or more than the sales price of the old home within two years before or after the sale, then the gain must be deferred. (You have no choice.) If the new home costs less than the old one, then a part of the gain is reportable.
Use Form 2119 to calculate the amount of gain to be reported now and the amount on which tax must be deferred.
If you're 55 or older, you may make a one-time election to exclude up to $125,000 of gain. (This is optional.) Any remaining gain follows the same reporting rules I explained earlier. Form 2119 also provides a section for this calculation.
Q: I am financing a $46,000 loan at 10 percent for the purchaser of a home (which I never owned), on which he is paying me $400 a month on a 30-year payment basis. Must I report the actual interest portion of each payment or is there a provision for pro-rating the interest over the duration of the mortgage?
A: You must report as interest income the interest portion of each payment. You are not permitted to pro-rate the interest evenly over the life of the mortgage.
It isn't necessary to make the actual computations each month. You can get an amortization table for a 30-year 10-percent loan that tells you the interest and principal breakdown for each payment.
Ask your bank if they have such a table; or they may have a book of tables from which you can make a photocopy of the one you need. If not, you may be able to buy an inexpensive table at a commercial stationer.
Q: Under the Maryland Uniform Gift to Minors Act, parents may transfer $6,000 worth of assets each year through 1981 to each of their children without gift tax liability. Is this limit raised to $20,000 starting in 1982? Can parents deduct this transfer from their income tax?
A: Yes and no. Yes, the individual gift tax exemption is raised from $3,000 to $10,000 for 1982 and later years, with a corresponding increase from $6,000 to $20,000 if both husband and wife join in the gift.
This annual gift tax exclusion is not limited to children. It is available for gifts to anyone, and no family relationship is required.
In addition, beginning this year there is an unlimited gift tax exclusion for direct payments on behalf of another for educational purposes and medical needs.
But no, the amount of the gift may not be used to reduce the giver's income tax liability. The exclusion applies only to gift tax liability.
The only income tax implication is the transfer of income tax liability from the donor to the recipient for future earnings on the transferred assets.
Q: I'm a real estate agent with a Keogh account invested in saving certificates. If I were to roll this money over into a self-directed Keogh that invested in income-producing properties, how would the capital gains be taxed?
A: Income, including capital gains, earned in a self-directed Keogh loses its identity. All subsequent withdrawals are taxed as ordinary income in the year received.
For that reason most counselors recommend that Keogh and IRA funds be invested to produce primarily ordinary income. Investments that generally produce sheltered income of some kind (and a capital gain is tax-sheltered income) should be reserved for your other available funds and should not be placed in a Keogh or IRA.