Money Management Q&As

May 21, 2001

When you can deduct passive activity losses, Using one bank for personal and business accounts, Why some home sellers may get a better price, How a will supplements a living trust, Is the beneficiary restricted when pension money ends up in a Roth IRA? Whether employee health insurance covers live-in companions, Putting the brakes on a stock-price slide


Money Management

Jump to:Choose article section...When you can deduct passive activity losses Using one bank for personal and business accounts Why some home sellers may get a better price Is the beneficiary restricted when pension money ends up in a Roth IRA? Whether employee health insurance covers live-in companions Putting the brakes on a stock-price slide How a will supplements a living trust

When you can deduct passive activity losses

Q I share in the passive losses from a rental property of which I'm a part-owner. The partnership pays me $5,000 a year for the time I spend supervising the property. Can I use some of my loss to offset this income?

A No. Payments to partners for personal services don't count as passive income. Unless you have income from some other activity classified as passive, you'll have to delay claiming your passive losses until you dispose of your partnership interest.

One exception: You're allowed to deduct up to $25,000 of rental property losses from your regular (nonpassive) income if your adjusted gross income for the year doesn't top $100,000. You lose $1 of this allowance for every $2 of AGI above $100,000, so you get no deduction if your AGI totals $150,000 or more.

Using one bank for personal and business accounts

Q A local bank has offered me a very good interest rate on a new certificate of deposit for my personal account, if my solo corporation continues to maintain an existing money-market account there. The bank manager claims that federal insurance would cover the two accounts separately. But since all the money belongs to me, couldn't I get stuck if the total in the two accounts exceeds $100,000, as might happen occasionally?

A No. Funds deposited by a corporation, partnership, or association that engages in an independent activity are insured separately (up to $100,000) from the personal accounts of stockholders, partners, or members. In this context, "independent activity" means the organization wasn't set up just to qualify for extra deposit insurance. If you were the sole proprietor of an unincorporated practice, though, you'd get only $100,000 of total coverage for the two kinds of accounts, because you'd be considered the owner of both.

Why some home sellers may get a better price

Q I took my house off the market last year, because I couldn't find a buyer at my $340,000 asking price. Now an agent says my chances of a sale are better, due to a big increase in the "conforming loan" limit. What's that, and how does it help me?

A The Federal Housing Finance Board, a government unit, collects monthly data on home purchase prices and loans nationwide. Based on year-to-year changes as of October, Fannie Mae and Freddie Mac determine the maximum size of loans—known as the conforming loan limit—that they can rebuy from mortgage lenders. Because lenders know they can unload such loans if they wish, they tend to charge lower interest on them than on larger ("nonconforming" or "jumbo") mortgages. The rate differential is usually 0.25 to 0.5 percent.

For 2001, the conforming-loan limit is generally $275,000, up from $252,700 last year. (The limit is 50 percent higher in Alaska and Hawaii.) So if a buyer of your $340,000 home puts down 20 percent ($68,000) and borrows the $272,000 balance, he'll be eligible for the conforming interest rate. To get the conforming rate last year, he'd have needed to make an $87,300 down payment. That's why the real estate agent is correct in thinking your chances of a satisfactory sale have improved, assuming other things are equal.

Is the beneficiary restricted when pension money ends up in a Roth IRA?

Q When I retire this December, I'll take my pension plan distribution as a lump sum and roll it into an IRA to avoid immediate tax. Next year, I intend to convert that account to a Roth IRA. My wife is now the plan beneficiary, but we want to name our son the Roth IRA beneficiary rather than have the money go to my wife when I die, which would increase the tax on her estate. Is this allowed?

A Yes. Under federal law, you can designate anyone the beneficiary of a Roth IRA with your spouse's consent, and the trustee or custodian must distribute the funds in the account to that person. However, if you don't get your wife's consent and she later asserts a claim under state law, the executor of your estate may have the duty to recover part of the distribution made to the IRA beneficiary. This contingency is unlikely in your case, since your wife presumably agrees to the disposition you have in mind.

Whether employee health insurance covers live-in companions

Q Our corporation provides family health and accident insurance to employees, and we're thinking of extending the coverage to employees' live-in partners, including same-sex companions. But our accountant says this could create tax problems. Is he right?

A Partly. Expenditures to attract employees and maintain their goodwill are legitimate business deductions, and that's clearly the purpose of the extended coverage you're contemplating. However, an employee's taxable income includes the value of coverage for someone who isn't a spouse or dependent. So the corporation and the employee would each have to pay 6.2 percent Social Security tax on that additional income (up to the overall limit—$80,400 in 2001), plus 1.45 percent Medicare tax on the entire amount. The employee would owe income tax on that amount as well.

However, neither would owe any tax if the companion qualifies as a dependent. That would be the case if the companion is a household member for the whole year and the employee furnishes more than half the companion's support. Furthermore, the relationship between employee and companion must not violate local law. Nor can a same-sex companion be treated as a spouse for federal tax purposes, regardless of local law.

Putting the brakes on a stock-price slide

Q I vaguely recall reading investment articles that recommend using options to protect paper gains on stocks as long as they're held. Can you describe how?

A The simplest way is to buy a put option, giving you the right—but not the obligation—to sell your stock at a specified exercise ("strike") price anytime during the option period. That's generally three months, but longer-term puts are available—in some cases, up to three years.

If the stock's outlook remains promising, you can allow the put to expire. If you're willing to sacrifice some protection, you can cut the cost of the put's premium by buying one that's "out of the money"—one whose strike price is below the stock's current market price. Say you have a 20-point gain in a stock that's now at $100. A put with a strike price of $95 would preserve three-fourths of your gain.

How a will supplements a living trust

QI live in a state where probate costs are high, so I think my heirs would benefit if I set up a revocable living trust. But a friend who has one says I'll need a will as well. Why should I?

A The main purpose of the will is to deal with assets that the trust doesn't hold title to when you die. This could happen if you keep an asset in your own name temporarily for convenience and forget to transfer title or die before you get the chance. (It's not enough just to list an asset in the trust document; it must be properly titled.)

Without a will, state law determines who inherits such assets. The will can be very simple, merely conveying the assets to the trustee via a "pour-over" provision and directing him to administer and distribute them according to the trust's terms.

Edited by Lawrence Farber,
Senior Editor


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 (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management. Medical Economics 2001;10:147.