Questions to Prepare a 1040 By

Q. We purchased two pieces of sculpture last year at an auction held to benefit our local museum. We paid the museum. What portion of the payment may we deduct as a contribution to the art museum?-- B.A .

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A. You may deduct that portion of your payment that exceeds the fair market value of the items you purchased. The museum should provide you with a detailed statement.

By the way, the law governing this matter is the same one covering tickets to special fund-raising events. The IRS now requires charitable organizations to list the value of food, liquor, entertainment or other goods provided to attendees of any fund-raising event. The difference between that amount and the ticket’s price may be deducted as a charitable contribution. This is obviously an effort by the IRS to prevent taxpayers from deducting the full amount of a ticket to a fund-raising event that provides donors with something of value.

SBA Loan Interest May Be Deductible

Q. May I deduct the interest I pay on a loan I received from the Small Business Administration to repair my home after the Northridge earthquake? *

L.L .

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A. Assuming that the loan is secured by your home and the total amount of your mortgage borrowings does not exceed IRS limits on mortgage deductibility, the answer is yes.

Divvying Up Gain on Property Exchange

Q. My two brothers and I entered into a tax-deferred exchange with some property we each owned a one-third interest in. The exchange was only partially tax-deferred since the value of the new property was $45,000 less than that of the old. The proceeds were divided equally among us, but the 1099 was issued only to me. I feel I am responsible only for a $15,000 gain. What can I do?-- R.J .

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A. You should report the full amount of the distribution on Schedule D of your tax return, just as it was reported on the 1099. Then deduct the portion that was disbursed to your brothers, leaving only your taxable portion.

You should then attach a note to your return showing how the proceeds from the transaction were actually distributed, what accountants call a “nominee distribution.” List your brothers’ names and Social Security numbers. Your brothers should be sure to report their fair shares of the proceeds or risk the obvious consequences.

Life Interest in Home May Be the Answer

Q. My boyfriend and I are both 75 years old and, after living in his condo for the last 10 years, are thinking of buying a house together. As things stand now, our respective children will have an easy time dividing our estates since we hold our property separately. We are concerned that our financial situation will become vastly more complicated if we co-own a home. How can we keep things simple?-- L.B .

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A. Although you are no doubt looking for a solution that avoids a visit to an attorney, your question deserves the attention of a qualified estate specialist and you are urged to consult one before taking any action.

That said, one potential plan would be for you and your boyfriend to purchase your new home as joint tenants and for each of you to separately make provisions in your wills for the other partner to have a life interest in each other’s half of the house. (Other assets will be dispersed according to other terms of your wills or trusts.)

By providing each other with a life interest in the house, you can ensure that, upon the death of the first of you, the survivor can continue living in the house for as long as he or she wants. Upon the death of the survivor, the house can be sold and the proceeds divided according to the terms of your wills.

A Duplex, a Divorce and a Taxable Gain

Q. My daughter’s share of real estate sales profits during her first marriage was $40,000. After she divorced, she purchased a duplex with her brother.(Her share of the purchase price was equal to her share of the sales price from her previous home.) She remarried. But because she was unable to sell her portion of the duplex, she rented it out. Now she has a buyer. The duplex has declined in value by $20,000 since her purchase. What is her tax situation? --D.S .

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A We have to make some assumptions here. First, we’ll say that your daughter is purchasing another home with her new husband and her share of the sales price of the new home is equal to the sales price of her interest in the duplex. Next we’ll assume that she was actively trying to sell the duplex during the time she rented it. Under this scenario, your daughter is carrying forward a $20,000 gain that may be taxable sometime in the future. If she depreciated her share of the duplex while it was rented, this amount would be increased by the amount of that depreciation.

If your daughter did not purchase a home with her new husband, she faces an immediate taxable gain of $20,000, plus any depreciation of the rented duplex.