Q My wife and I (age 71) spend six months in the south and six months up north each year. We have become residents of Florida, where we have an apartment, and are now considering selling our home up north. Question: Because our state of residence is now Florida, can I utilize the $125,000 tax exclusion on my home in our original state? A It depends on when you changed your official home to Florida. Aside from the age qualification, you must have owned and occupied the property as your principal residence for at least three years during the five-year period immediately preceding the sale. When you changed your state of residence to Florida, you officially made the Florida apartment your principal residence. The home up north -- the one you now plan to sell -- then became your secondary residence.
But the home you sell does not have to be your principal residence at the time of sale -- only for three of the past five years. So if you changed your state of residence to Florida within the past two years and can sell the old homestead before you run out of time, you will be able to claim the $125,000 exclusion of gain.
Q I am holding a large second trust note from the sale of an investment property in 1984. When I sold the property, I elected to use the installment method to defer the gain on the sale. Because the capital gains tax was more favorable in 1984, can I now file an amended return for that year to report all the gain on the sale? Do I have to ask permission of the IRS? If so, what are the chances of it being approved? A For the benefit of other readers, let me confirm what you apparently already know: The provision of the Tax Reform Act of 1986 that repeals the 60 percent exclusion of long-term capital gain applies to all capital gain income received after 1986 even if received under an earlier contract.
Unfortunately, the election out of the installment method must be made by the due date (including extensions) of your tax return for the year of the sale. Generally, once made, the choice may not be changed. You may appeal to the IRS for a revocation, but consent is highly unlikely if -- as in this case -- a reason for the revocation is the avoidance or reduction of income tax.
Q I have found great confusion among friends who are military or federal government retirees as to whether we are required to file new W-4 forms. A notice from the Retired Pay Department of the Navy Finance Center says, "The Tax Reform Act of 1986 requires all retirees to file a new IRS W-4 before Oct. 1, 1987." But a letter in Mike Causey's column of March 23 and a statement in your column of the same date say a new W-4 is not required of retirees.
A The Tax Reform Act of 1986 requires all employes to file a new Form W-4 before Oct. 1, 1987; and the IRS says it will not penalize taxpayers for underwithholding if a new W-4 was filed by June 1. However, the act is silent on the question of retirees, leaving the old law in place.
Thus you are not required to have tax withheld from retired pay or to file a W-4, but may instead make quarterly estimated tax payments (if tax liability is anticipated). The Navy people, however, may want to have on file a written record of your wishes. In any case, if tax is now being withheld, you should review your expected tax bill and file a new W-4P (not W-4) if you wish to change the basis for withholding. Q In planning my estate, I have placed the majority of my financial assets into inter vivos (living) trusts, with myself as trustee, to avoid probate later. But if I take this action with my residence, will I lose the one-time tax-free exclusion of gain if I should sell the house while still alive? A If you are using a revocable trust, transfer of your principal residence will not preclude your use of the $125,000 exclusion on sale of the home during your lifetime (assuming you meet the age and time requirements). The theory is that by reserving the power to revoke, you have not surrendered ownership of the property.Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, in vestments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business &Finance News, 1150 15th St. NW, Washington, D.C., 20071.