Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 25, 1993 TAG: 9301230050
SECTION: BUSINESS PAGE: B5 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
AGAIN, DIVORCE IS NEVER SIMPLE
Q: As part of a divorce settlement in 1984, the house that my former husband and I had acquired early in our marriage was conveyed to me and my son. This is also applicable to a house which my mother resides in rent-free.Each property was conveyed to my son and me in consideration of the sum of $10. My son and I own both pieces of property as joint tenants. My son no longer lives with me.
I want to sell the house I live in and take advantage of the rule of 55. I am retired, almost 58 years old and do not wish to reside in this house any longer. In order to get the title in my name only so I can sell without penalizing either myself or my son taxwise, is it just a simple issue of changing the names on the titles?
A: Donald L. Wetherington, a lawyer with the Roanoke firm of Wetherington & Melchionna, said tax law allows a one-time exclusion of up to $125,000 from the gain on the sale of a personal residence if the taxpayer turns 55 prior to the sale. The person also must have owned and used the home as a principal residence for at least three of the preceding five years.
If the taxpayer holds title jointly with someone other than a spouse, he said, each is treated separately in applying these rules. Your letter suggests that if you and your son sell the house, you can exclude up to $125,000 from any gain on the sale of your half. Your son is obviously younger than 55, so he is ineligible for the exclusion on his half.
You do not say how long your son has been gone from your home and whether he has purchased another residence. Depending on those circumstances, Wetherington said, your son might be eligible to defer taxes on the gain from his half if he reinvests the proceeds in another house within two years.
If your gain would not use up the $125,000 exclusion, your son might transfer his interest to you if he is willing to sign away his ownership. But, Wetherington said, you then would have to maintain the house as your residence for another three years to qualify under the rules for an exclusion on his half.
Based on the facts you provide, he said, sale of the property occupied by your mother would not qualify for the exclusion.
Wetherington said the full tax implications would depend on your tax basis and your son's tax basis in the property, as well as the sale price. He said your basis could depend on the date when you acquired the properties because there was a change in the law in 1984, the year in which you came to own the property. Also, it is not clear whether you had an interest in the properties prior to the divorce settlement.
You should see a tax adviser before you plan your course of action.
\ Of Ginnie and Fannie
Q: As a senior, I have some investments for growth but I also must have some for income.
Will you explain Fannie Maes and Ginnie Maes and what the difference is in the two? Also, would either of these be a good investment for a senior? I have a broker, and he suggests Fannie Mae for me.
A: Both Fannie Maes and Ginnie Maes are bonds created from pools of home mortgages. They carry low to medium risk as investments.
The primary advantage is that they pay higher interest than you can hope to get in a bank certificate of deposit.
Ginnie Mae stands for the Government National Mortgage Association, which is owned by the federal government. Fannie Mae is short for the Federal National Mortgage Association. FNMA was charted by Congress, but it is a private corporation. Its mortgage pools are generally larger than those of GNMA.
All of the mortgages in both pools are backed by the federal government. A government agency makes good on the payments into the pool if a homeowner defaults. That means the principal is largely protected if you hang on to your share of the pool.
The securities can be sold on a secondary market, which means you have liquidity. You can get your money if you need it for an emergency.
The value on the secondary market, however, fluctuates inversely to interest rates. This is true of all bonds. But if you want to sell early, you could lose some of your principal if interest rates are rising.
If the rates fall, of course, you will gain money. What usually happens then, though, is that the homeowners rush to refinance their houses at the lower rate. In that case, your pool is paid off early so you must reinvest.
Your monthly check, because it reflects the mix of payments by the homeowners, will include principal as well as interest. As time passes, you will get more principal and less interest. Your monthly payments will dwindle into nothing, and there is no principal at the end because you have been receiving it back in pieces all along. You face the continuing demand of separating the monthly income from the principal, then reinvesting the latter. Many people fail this challenge and fritter away their principal by spending the full monthly checks. You must have the self-discipline to handle this factor before choosing this investment.
\ Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.