Tax Basis

Q: In a divorce, how is the income tax basis of the couple's home handled if one spouse keeps the house and the other spouse is cashed out of his equity?What happens to the property tax assessment of the house if the selling spouse is cashed out at a far higher value than what the house is assessed?Is the spouse who stays in the house subject to an increase in property taxes just for continuing to live there?A: A divorce does not change the income tax basis or the property tax assessment of a couple's home in any way.If one spouse keeps the house as part of the property settlement, the value assigned to the half of the house given up by the other spouse is irrelevant to the home's actual tax basis.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of baltimoresun.com's weekly tax advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. My father "gifted" his house to my sister and me in October 2005. He retained lifetime rights. He passed away in June last year, and we sold the house in December. Do we owe capital gains tax? If so, on what portion? - Valerie, Pocomoke, Va. The tax basis in the house will be the same as your father's basis - increased by a proportional amount of any gift tax that he paid when he transferred the house to you. Assuming that he purchased the house, your dad's basis would be the cost that he paid plus any improvements made to the house.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.Q: I just did a cash surrender on two life insurance policies. Is the money that I get from those required to be reported as income? If so, will I receive something from the insurance company telling me that?A: Money received when cashing out an insurance policy is a reportable item. Whether it is subject to tax depends on your tax basis [cost] in the policy. If the amount received is greater than your tax basis, then the difference is ordinary income, subject to tax. If the tax basis is greater then the amount received, no loss is allowed.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. On a direct rollover from a company retirement plan to a 401 (k) at a bank, is the gross distribution amount on the form 1099-R added to the total earnings, even though no federal tax is withheld? -- Ted, Fallston Direct rollovers between retirement plan accounts are generally not taxable.

Q: My wife and I own a duplex with a $160,000 tax basis and a $1 million market value. Upon the death of the first of us, our daughter will inherit the deceased's half of the property. What will her tax basis be?-H.B.A: Your daughter's share will be valued as of the date of death of the deceased. If the property is worth $1 million at that time, her tax basis would be $500,000.A question that you did not ask is what will be the value of the surviving spouse's share? If the property is held in joint tenancy, the survivor's share is set at half the original tax basis, or $80,000.

Criimi Mae Inc. posted higher earnings for both the third-quarter and nine-month periods, but significant operational changes to stem the impact of rising interest rates could be in the offing, the company said yesterday.The Rockville-based firm, the nation's largest real estate investment trust (REIT) specializing in government-insured mortgages, reported tax basis income of $5.78 million, or 23 cents a share, on operating revenues of $17.6 million in the quarter that ended Sept. 30. Those results compared to tax basis income of $5.2 million, or 26 cents a share, on operating revenues of $14.1 million in the same period last year.

Criimi Mae Inc. yesterday announced the purchase of a series of high-yielding securities for $26.5 million, part of the real estate investment trust's effort to stem the effects of rising interest rates.The Rockville-based REIT expects that the mortgage-backed securities, tied to nearly 100 commercial and apartment loans in 19 states, will yield between 16 percent and 23 percent. The loans carry a face value of $292 million.Criimi Mae invested in the uninsured loans, which carry second-tier ratings because of the risk of default associated with them, to offset an anticipated drop in 1995 earnings resulting from higher interest rates.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of baltimoresun.com's weekly tax advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. My father "gifted" his house to my sister and me in October 2005. He retained lifetime rights. He passed away in June last year, and we sold the house in December. Do we owe capital gains tax? If so, on what portion? - Valerie, Pocomoke, Va. The tax basis in the house will be the same as your father's basis - increased by a proportional amount of any gift tax that he paid when he transferred the house to you. Assuming that he purchased the house, your dad's basis would be the cost that he paid plus any improvements made to the house.

Q: I still do not understand the difference between community property and joint tenancy. My wife, age 55, and I, age 70, hold our home as joint tenants, but our friends insist that we change it to community property. Should we?A: There are considerable advantages to holding your home and other assets as community property rather than as joint tenants. Although holding as joint tenants may avoid probate upon the death of one spouse, any savings in time and costs may be more than offset by the loss of the principal advantage of community property, which is a step-up in value for 100 percent of all marital assets to the decedent's date of death.

Selling investment real estate can result in a rude awakening when it comes time to pay federal and state income taxes on the profit earned from the sale. Income tax must be paid on the recognized gain. The gain is not necessarily measured by deducting the original cost of the real estate from the sales price. Instead, the original cost must be adjusted to compute the tax "basis" of the property. Original cost is adjusted upward for money spent to improve the property to the extent these expenditures have not been deducted from property income for tax purposes in prior years.

Baltimoresun.com's tax advice column features three experts from the Hunt Valley accounting firm SC&H Group answering questions about preparing your return. Here is an edited excerpt of this week's column: I worked for a company that filed for bankruptcy. When they filed, they owed me 20 days of vacation. I filed a claim as a creditor. I have been notified by the court that the company never came out of bankruptcy. Can I claim this as a loss, as the debt will never be paid? - Barbara, Baltimore Individual taxpayers file on the cash basis method of accounting.

Selling investment real estate can result in a rude awakening when it comes time to pay federal and state income taxes on the profit earned from the sale. Income tax must be paid on the recognized gain. The gain is not necessarily measured by deducting the original cost of the real estate from the sales price. Instead, the original cost must be adjusted to compute the tax "basis" of the property. Original cost is adjusted upward for money spent to improve the property to the extent these expenditures have not been deducted from property income for tax purposes in prior years.

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.Q: How should I report the sale of 44 shares of NCR stock that I received as a result its spinoff from AT&T? I got a certain number of NCR shares for the many shares of AT&T I had, so I didn't really pay for anything.A: AT&T should have provided you with some information when the spinoff occurred. Basically, your tax basis in the NCR stock will be a portion of your tax basis in the AT&T stock you held immediately prior to the spinoff.

Criimi Mae Inc. yesterday announced the purchase of a series of high-yielding securities for $26.5 million, part of the real estate investment trust's effort to stem the effects of rising interest rates.The Rockville-based REIT expects that the mortgage-backed securities, tied to nearly 100 commercial and apartment loans in 19 states, will yield between 16 percent and 23 percent. The loans carry a face value of $292 million.Criimi Mae invested in the uninsured loans, which carry second-tier ratings because of the risk of default associated with them, to offset an anticipated drop in 1995 earnings resulting from higher interest rates.

Criimi Mae Inc. posted higher earnings for both the third-quarter and nine-month periods, but significant operational changes to stem the impact of rising interest rates could be in the offing, the company said yesterday.The Rockville-based firm, the nation's largest real estate investment trust (REIT) specializing in government-insured mortgages, reported tax basis income of $5.78 million, or 23 cents a share, on operating revenues of $17.6 million in the quarter that ended Sept. 30. Those results compared to tax basis income of $5.2 million, or 26 cents a share, on operating revenues of $14.1 million in the same period last year.