Question: My wife and I are 76 years old and have owned a vacation property for over forty years which has appreciated from $30,000 to $250,000. There may be benefits to leaving it to our two children but I would like to stop the upkeep and preside over the sale myself. The children will eventually get the proceeds after we die. The entire family has enjoyed our time there but with their busy lives and our advancing age, time spent there is dwindling. In the past I’ve done the maintenance myself and I can’t afford to pay someone else at this point nor can my children afford to pay the maintenance. What can I do to minimize my tax obligation? L.T.
Answer: Let’s explore three options.
1. Pool your resources. Meet with the children and discuss how all of you might pool your resources to handle the maintenance. You may be surprised that together, you may accomplish what appears unfeasible individually.
Rent. Since you and your children are spending less time there than in the past, would it be possible to rent it to others who would enjoy it as you have? Start with friends and extended family members and expand your search either through a rental company or through a web site service such as www.VRBO.com
. Your goal will be to rent it enough to cover maintenance costs (which may increase with the rental activity). In years past I’ve owned condos at the beach and a ski resort. Rental income easily covered maintenance, fees, property taxes and insurance. Renting also potentially adds additional tax benefits such as depreciation.
3. Sell. You could sell your vacation property and invest the proceeds so as to boost your retirement income. Based on the appreciation, you may owe as much as $44,000 in long-term capital gains taxes. The net proceeds from the sale could provide $350 to $700 per month depending on how it’s invested. Your income would also rise based on eliminating the expenses associated with the vacation home. The homes are widely varied in this regard — ranging from facilities that offer very few auxiliary services to those that take great pride in the comprehensive care options they provide.
Note that if you held the property until your death your children would receive a ‘step-up’ in cost basis based on the fair market value as of the date of death. This means they could sell the property the next day and avoid the capital gains taxes you now face.
Question: I read your column last week about annuities but I am still confused. Here’s my question: I’m 78 years old, in good health and have an annuity that I’ve never taken money out of except the Required Minimum Distributions each year. My advisor said to leave it alone and if I needed money, he could set up a monthly income. I don’t need any money at this time, however, I don’t know what the future holds and I want to be certain that if I need it, say, for healthcare, that I can get it. My wife is still living but not in as good a health as me. With the uncertain times ahead, what do you recommend? B.B.
Answer: Annuities are both complex and confusing products and each one typically offers a number of different options of things you can do. Your best bet is to sit down with a professional who does not sell products (such as a CPA) and have him/her review your options based on your particular situation. It may also be helpful to include the person who sold you the annuity at this meeting.
At a minimum, I’d want the answers to these questions:
· What interest rate is being paid on your annuity? I am assuming it’s a ‘fixed’ annuity versus a ‘variable’ annuity but you will want to confirm this.
· What expenses are being charged each year? A one to two percent annual expense load in this low interest rate environment we find ourselves today can be quite a drag on an annuity policy.
· Are there any restrictions on the amount of money you can withdraw from your annuity?
· Are there any fees associated with withdrawals?
If your annuity is held in a retirement account such as an IRA, you could roll it over to a non-annuity IRA at a bank or brokerage firm. At a bank, you could buy CDs or other similar investments and eliminate annual fees. This may or may not be your best choice…depending on the answers to the questions above.