Q: I would like to sell a vacant lot and need advice on how to minimize the capital gains tax I would owe. I purchased the lot in 1966 for $2,500; it is now worth $40,000 to $45,000. I have little other income except for $5,316 in Social Security.
A: As you probably know, there is no longer a 60 percent exclusion on long-term capital gains, so the entire gain would be taxed. However, there is a ceiling of 28 percent on the tax on long-term gains, which will be helpful.
You can reduce the gain by adding to your original outlay the cost of any improvements you have made since 1966.
Further, if you haven't been claiming the property tax each year as a deduction on your tax return (based on your income, you probably haven't even been filing returns), you can now "capitalize" all those tax payments and add the total to your cost.
If you get paid all cash, I estimate that your federal income tax for 1987 will run less than $5,000. Postponing the sale until 1988 won't get you any tax saving -- you'll still bump up against the 28 percent ceiling. If you were to take installment payments over a period of seven years or so, you could probably escape federal tax altogether; your personal exemption and standard deduction together will add up to at least $5,500 a year. But I would go this route only if I could get a reasonable interest rate on the unpaid balance and were sure of the purchaser's credit worthiness.
Q: I am confused by your reply in the Sept. 21 column regarding the $125,000 exclusion of gain on sale of a residence after death. Several months ago I asked this question of the IRS and was told that the exemption would apply -- but you said it would not. Perhaps there is a difference in the situation that I am not aware of; I would appreciate clarification.
A: Clarification is what you'll get. I should have included this further explanation in the earlier column. The question was asked: "Can an estate qualify for the $125,000 exclusion?" My answer to the specific question was correct -- the estate may not claim the $125,000 exclusion. The executor cannot exclude the gain on sale of the decedent's residence on the estate income tax return.
But I should have expanded the answer to respond to the situation you refer to: The executor may elect to exclude the gain if the sale is reported by the executor as "income in respect of the decedent" on the decedent's own final tax return, rather than on the income tax return of the estate.
Q: My parents have lived in the same house for more than 30 years. They paid about $40,000, and current market value is about $500,000. They plan to retire to a life-care community. Does the entrance fee (about $125,000) qualify as a replacement residence cost in calculating the capital gain on their house? If not, is it tax deductible in any way?
A: Unfortunately, the answer is "no" to both questions. Payment of an entrance fee to a retirement home that provides living quarters and personal care does not constitute purchase of a replacement residence for purposes of rolling over gain on the sale of a home.
And the $125,000 entrance fee is a personal living expense that doesn't qualify for any kind of tax deduction.
The only option they have is the one-time exclusion of $125,000 of the gain -- which won't protect a great deal of the total.
I can only remind you that they should add to their $40,000 cost the cost of any capital improvements -- a driveway, an added bath, storms and screens, etc. And remember that the tax ceiling on long-term capital gains is now set at 28 percent.
Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, 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.