IRS Could Add to This Joint-Tenancy Sob Story

Q: When my wife filed for divorce, I was forced out of the house by a court order. In the divorce settlement, my wife was given possession of the house until our youngest child turned 18. Now, three years later, our child is 18 and the house is being sold pursuant to the settlement agreement. Meanwhile, I have been living with a relative. Since my ex-wife and I hold the house as joint tenants, am I allowed to roll over my portion of the capital gain from the sale of the house into a new residence without paying taxes on it? --T.R.

A: According to our tax experts, you are not entitled to defer taxation on the gain from the sale of your former house because it has not been your principal residence for at least the past three years. You will have to pay taxes on your share of the capital gain. Your ex-wife, however, will keep the tax exemption because the house has been her principal residence.

You do, however, have one possible escape: sell your share of the house to your ex-wife. If you sell to your ex-spouse in a deal considered “incident to the divorce,” the IRS allows you to defer any gain by purchasing a new residence that costs at least as much as you receive from the sale.

One last word. The IRS has never formally ruled on the matter, but experts advise that one year is about the most the IRS is likely to allow an ex-spouse to live outside the family home and still claim it as a principal residence for the purpose of deferring taxation on any gain from the house’s sale.

Unloading Odd-Lot Stocks May Be Costly

Q: I inherited a small number of shares in a variety of companies. All the shares have a low value. Selling them through a full-service broker would cost us more than they are worth. I recall hearing of an odd-lot brokerage that specializes in just these situations. Do you know what I am talking about? If not, do you know how can I get rid of these shares without spending more than they are worth? --C.B.

A: Unfortunately, if your stocks really don’t have much value, you will not be able to sell them without paying more in sales commissions than they are worth.

After checking with several sources, we could find no brokerage that specializes in odd-lot stock sales and offers deep discounts.

According to our sources, you are most likely to find the lowest commission rates at discount brokerages, although a few full-service brokerages offer competitive rates. However, our sources say the lowest charge you can expect is $25 to $30 per stock. So, if you have stock from five different companies, you can expect sales commission charges of $125 to $150.

At these rates, you may well consider holding on to the shares.

401(k) Plan Doesn’t Preclude a Keogh

Q: If I have a main job but do free-lance work and report that income on a Schedule C, may I make tax-deferred contributions to a Keogh plan? How much will it cost to set one up? What sort of investments can this account hold? What are the options on how much to contribute? Is there a minimum amount that I must make or contribute to the Keogh each year? Also, if I am enrolled in a 401(k) plan at work, is my Keogh participation limited in any way? --G.S.

A: Even if you are employed and participate in a 401(k) through your employer, you may open a Keogh account and contribute a portion of your free-lance earnings each year. The test is whether you are truly self-employed in your free-lance operations. Typically, the matter comes down to whether you report your self-employed income separately on Schedule C. If you do, then you are entitled to a Keogh plan. If the income is reported on your W-2 wage statement, you are not considered self-employed.

Fees for establishing these accounts vary widely. At the minimum, you could spend $25 to open an account that conforms to a standard set by a bank or savings and loan. For a custom account, be prepared to spend $3,000 to $5,000 for the services of an attorney.

There are no minimum Keogh contributions required, and there are two ways to determine the maximum you may contribute each year. Under the “profit-sharing” plan, you may contribute up to 25% of your net self-employed income each year. When you establish a profit-sharing account, you select the percentage contribution you will make. Under a “money purchase pension plan,” there is no fixed annual contribution and each year you may contribute up to 15% of your earnings.

Be careful, however; your account can only be one or the other. If you want both features, you must open two accounts and make separate contributions. Many self-employed people do so; it can be beneficial if your Keogh contributions are large enough.

The IRS forbids foreign Keogh investments. Further, certain leveraged investments, such as real estate and related instruments, may produce income that the IRS considers taxable.