Q: I purchased a condominium recently both as an investment and to provide a place for my divorced daughter and my granddaughter to live. The going rate for similar units is $800 a month, but my daughter will pay rent of only $350 a month (all she can afford). How can this be handled so that I can get all the deductions for expenses and depreciation?
A: I don't think there is any way to claim the operating expenses for the condo in this situation. You can claim the mortgage interest and property taxes in full on Schedule A of your federal income tax return. According to the figures you gave in your letter, those two items alone will exceed the annual rental income, so you'll have to forgo any deduction for condo fees, maintenance and depreciation.
I asked the people at the IRS how they would view a monthly gift from you to your daughter of the necessary cash to permit her to pay you a fair market rental. As I suspected, they would consider it a tax evasion subterfuge, and would disallow the deduction anyway.
You might want to consult a tax attorney about the feasibility of establishing an inter vivos trust for about $50,000 with your daughter as beneficiary. This would generate perhaps $5,000 to $6,000 a year in income, permitting her to pay you the $800 market value rental and allowing you to claim all the investment expenses.
Of course, the IRS might be unhappy with this arrangement, too; and you should know that the Clifford trust is one of the areas being talked about for tougher treatment in any new tax legislation. But it might be worthwhile to investigate this possibility.
Q: While my holdings are modest, they are most important to me. Would you comment regarding the relative safety of U.S. paper (bills, notes and bonds) and issues of the Federal Farm Credit Administration or the Federal Home Loan Bank? I may have more than a prudent percentage of these bonds, but have bought them because they yield maybe a half-percentage-point better interest.
A: Issues of the various federal agencies like the ones you mention generally are considered to be second in safety only to Treasury bills, notes and bonds.
The latter are backed by the "full faith and credit of the United States." Except for a couple of agencies (including Ginnie Mae), the agency obligations do not have this explicit guarantee. However, there is an implied assurance that issues of the federal agencies will never be permitted to go into default of either principal or interest.
I wouldn't lose any sleep over the safety of these agency obligations. However, if it bothers you -- and it obviously does, or you wouldn't have raised the question -- then I suggest you get some diversification by moving some funds into T-bills or notes. Except for a very few people who are just barely getting by, the half-point difference in yield is not worth any concern you may have about safety.
Q: Late last year, my broker transferred stock purchased in 1980 (on which I had a large capital gain) to our 18-year-old son's custodial account under the Uniform Gift to Minors Act. The shares were sold a month later to pay his college expenses. Do I need to report the gift or sale on my tax return? What acquisition date and cost basis does my son use on his 1040? (This stock income plus some summer work requires that he file a return.)
A: You don't have to report either the gift or the sale on your income tax return. However, if the value of the shares on the date of the gift exceeded $10,000, you should file Form 709-A (the short-form gift tax return). There would be no gift tax liability; but the excess over $10,000 ($20,000 if your spouse consents to the gift) would be charged against your lifetime unified gift/estate tax credit.
In reporting the sale on Schedule D of his tax return, your son would use both your cost basis and your acquisition date. (Caution to other readers: The basis to be used by the son might have been different if the sale had resulted in a capital loss.)