Money Management

Exchanging mortgaged property instead of selling it

Q I can't find a cash buyer for an apartment building I own, so I'm considering an offer to make an even exchange for an office building. Would the swap be tax-free, even though it involves properties of different types? Does it matter that the office building has a bigger mortgage than mine?

A All types of business real estate qualify for a tax-free exchange. Since you're not getting any cash and the mortgage you're giving up is smaller than the one you're taking on, you won't have to pay current tax on your capital gain, if you have one.

The other owner's case is different. Let's say your mortgage is $50,000 and his is $75,000. The $25,000 difference counts as cash for him. That much of his profit will be taxable when the deal closes.

Why a safe harbor 401(k) may be unsuitable for you

QA doctor friend has adopted a safe harbor option for his practice's 401(k) plan, to increase his own permissible contributions. He's urging me to do the same, but does this strategy have disadvantages as well as benefits?

A It could. For example, if you choose a safe harbor option that requires you to contribute 3 percent of employees' compensation, you can't leave out those with less than 1,000 hours of service during the year, as many other plans do.

What's more, employees' rights to that money vest immediately. With plans that call for gradual vesting, your contributions for an employee may remain in the plan if he or she leaves before becoming vested. Several additional factors may have a bearing on whether a safe harbor 401(k) is a wise choice for you. They're discussed in "A big new break for pension plans. But act fast!" Sept. 4, 2000.

Former homeowners can be first-time homebuyers

QMy wife and I sold our home in 1998 and have been renting a house since then. If we build another home now, can we withdraw $10,000 apiece from our respective IRAs to help pay for it, without incurring a penalty in addition to the regular tax we'll owe?

A Yes. Since neither of you has had an ownership interest in a main home for at least two years, you're both considered "first-time homebuyers." That means the 10 percent penalty on early IRA withdrawals will be waived if you use the funds to buy, build, or finance your new home.

You must start construction or sign a binding contract to do so no later than 120 days from the date you take the money out. Keep in mind that each of you is subject to a $10,000 lifetime limit. In other words, you can't come up with a $20,000 total by withdrawing, say, $15,000 from one IRA and $5,000 from another.

How togetherness affects car insurance

QMy fiancee lives with me and sometimes drives my car. Will my auto insurance policy cover her in case of an accident?

A In this situation, coverage issues can be tricky. Your insurance generally protects a licensed driver to whom you lend your car. However, if the car is "regularly available" to your fiancee, a claim under your policy might be open to question.

Also, the policy may not provide the same level of coverage it would for a spouse or resident family member. For instance, the clause covering harm caused by an uninsured motorist might not apply. Depending on circumstances, it may make sense to get a joint ownership endorsement. You'd do well to consult your insurer on these points.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2001;13:149.