Members of the Maryland Association of Certified Public...

Tax questions

April 15, 1997

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.

Q: Are there ways to defer -- or avoid -- the capital gains on the sale of a vacation home that is not a primary residence? The home in question has never been rented or leased.

A: Several ways exist to defer or avoid the capital gains on the sale of a vacation home. For instance, you may want to exchange the property for other improved or unimproved real estate. Assuming certain steps are taken, this transaction can be structured to avoid all gains for tax purposes. Or, as an alternative, you might wish to convert the property to rental status and generate cash flow from the rental activity. If adequate equity exists, you may wish to borrow against the equity and use the money to create or add to an investment portfolio. Finally, you might contribute the property to a charitable trust, which could then sell the property tax free and invest the proceeds in a diversified investment portfolio and pay you an annuity for a period of years or even the rest of your life. In addition to the annual payments, you would be entitled to a charitable deduction for the portion of the asset transferred to the trust. However, the annual payments to you from the trust would be taxable.

Q: Is child support deductible from the payer's income tax as well as taxable to the recipient?

A: Child support as opposed to alimony, is neither deductible by the payer nor taxable income to the recipient. Alimony is deductible by the payer and taxable income to the recipient.

Q: I recently received a large sum of money for the sale of some timber. Does this timber sale qualify for a long-term capital gains deductions?

A: If you owned the timber (or held the contract right to cut the timber) for more than one year, you may elect long-term capital gains treatment for such sale. There is no longer any long-term capital gains deduction, although there is a maximum federal income tax rate of 28 percent for long-term capital gains, which are computed on Schedule D of Form 1040.

Pub Date: 4/15/97

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