Q. Last year, my landlord wanted me to vacate my apartment three months before my lease expired to make way for a long-term high-paying tenant. As an incentive to get me to leave, I was paid $3,000. Can I treat this payment as a tax-free gift or am I required to report it as taxable income?
A. The $3,000 is fully taxable. Amounts received by a tenant for canceling a personal lease are taxed as capital gains -- at a maximum rate of 28 percent. In contrast, lease-cancellation payments paid from a tenant to a landlord are taxed as ordinary income at a maximum rate of 31 percent.
Q. I just turned 55, applied for early retirement from my job and sold my house for $120,000. My wife and I acquired the house in 1977 for $90,000. I realize this $30,000 gain can escape taxation if we spend $120,000, or more, to replace the house within two years. However, my wife and I plan to spend the next few years traveling around the world.
I took early retirement while we still had our health and enough energy to enjoy world travel. The last thing we want to do is settle down to another permanent residence. If I use the special "55-and-over" $125,000 election to avoid taxes on this sale, I can fully eliminate the $30,000 gain. But I am not sure how to handle the unused portion of this special exclusion.
Can I apply the unused exclusion as a carry-over, to be used in future years against future home sales? Even though we plan to travel for a few years, in time we might buy another home or a condominium.
A. Unfortunately, this once-in-a-lifetime exclusion cannot be broken up in parts and used on a piecemeal basis. Even though your current gain is only $30,000, if you make the election, the remaining portion of the $125,000 exclusion will be wasted. It will not be available to apply against future home sales.
Worse yet, if you file a married-joint tax return with your wife, she also will be precluded from ever claiming this election. And if you or your wife should ever remarry, filing a joint tax return with a new spouse will preclude the new spouse from claiming the $125,000 exclusion.
My advice would be to do nothing now, other than disclosing details of the 1991 sale on your tax return. You have two years to replace the property. Who knows? You might tire of traveling and decide to settle down. In that case, a rollover into a new residence, costing $120,000 or more, will wipe out any tax liability without wasting the exclusion.
(Myron Lubell will answer your questions about taxes until April 15. Send questions to Myron Lubell, Business Monday, 1 Herald Plaza, Miami, Fla. 33132.)