Money Management

When you sell a home you formerly rented out

QWe moved into a house we'd owned and rented out since 1990, figuring we could sell it after living in it for two years and not pay tax on our profit. While it was a rental property, we deducted about $60,000 in depreciation. Is it true the home sale exclusion won't cover the gain from that?

A Partly. You'll owe 25 percent tax on your gain from depreciation claimed after May 6, 1997. Let's say your cost basis—purchase price plus improvements, minus total depreciation—is $140,000, and you sell the home for $350,000. That gives you a gain of $210,000. If $20,000 of this was due to post-May 6, 1997 depreciation, the exclusion (up to $500,000 for married couples) will shield $190,000 from tax, but you'll have to pay $5,000 (25 percent) on the remaining $20,000 of gain. Note that the usual 20 percent capital gains tax rate doesn't apply in this case.

Exchanging foreign currency that the euro has replaced

QI'll be going to Europe later this year. Will I be able to use several hundred dollars worth of European national currencies left over from my last trip, or should I ask a US bank to convert them to euros now?

A You're apt to get more for your money if you convert it in the countries of issue. Although merchants there can no longer accept former currency, commercial banks will do so for various lengths of time—until Dec. 31, 2002 in Belgium and the Netherlands, for example. Thereafter, you may have to convert through central banks. Some will allow exchanges for up to 10 years, others indefinitely.

Don't let some villain steal your good name

QSeveral acquaintances have been plagued by unauthorized credit card charges as a result of identity theft. What can I do to prevent this from happening to me or my family?

A The Federal Trade Commission recommends these precautions:

•When you release personal identifying information—especially your Social Security number—always ask how it will be used and whether it can be kept confidential. Give it out over the phone or Internet only if you know the party you're dealing with.

•When choosing passwords for your accounts, make sure you don't base them on readily available or obvious data, like your birth date.

•Tear up or shred discarded receipts, bank statements, and credit card or loan offers you get in the mail. Potential identity thieves might pick through your trash.

•Deposit your outgoing mail in a post office collection box, not in an unlocked receptacle at your home.

•Alert your creditors if their bills don't arrive on time. A missing bill could mean a thief has taken over your account and changed the billing address.

•Order reports from credit agencies periodically, to uncover errors or fraud before they can wreak havoc with your finances.

A new twist in a tax-free exchange

QI want to dispose of a rental property I own and postpone tax on my gain by making a like-kind exchange for another property. But the seller of the property I intend to acquire insists on closing before my potential buyer can take over my present property. I can finance the acquisition, but would the exchange still be tax-free?

A Yes, if an unrelated party, such as a bank offering exchange services for a fee, acts as intermediary. Normally, you'd make the swap by acquiring the new property after transferring your old one (you usually have 180 days to do this). Instead, you're contemplating a "reverse" exchange.

Your bank can facilitate it by taking temporary title to the replacement property under a "qualified exchange accommodation arrangement." The bank agrees to turn the property over to you once you've transferred the title for the property you now own. If the transaction is completed in 180 days and you don't receive any cash or kind property that doesn't qualify as like-kind, you can defer tax on any capital gain until you eventually sell the new acquisition. For additional details about the technical requirements, see IRS Publication 544.

Why similar index funds may have different after-tax returns

QI own a fund that tracks the S&P 500 index. I was disappointed to discover that its after-tax return was lower than that of similar funds. Why is this so, given that all of them presumably have the same stock portfolio?

A Fund managers must continually adjust holdings to reflect cash inflows and outflows as investors buy and redeem shares. Since the timing and extent of investor activity varies from one fund to another, so will the managers' timing and results.

Another factor is the way managers invest cash reserves. This also affects the amount of taxable income distributed to shareholders. Accordingly, it's worth checking an index fund's tax efficiency before you invest.

Can you buy and improve a home with one loan?

QI've found a home I like, but it needs substantial remodeling. Can I get a first mortgage to cover the $200,000 purchase cost plus about $75,000 for the improvements?

A Yes. Lenders who work with Fannie Mae offer this type of purchase-renovation mortgage. The amount for improvements can be up to 50 percent of the post-renovation appraised value, with as little as 5 percent down. The lender will make sure the contractor is properly licensed and bonded, check the contract terms (including change orders), and disburse scheduled payments after inspection at various stages of the job. You can obtain a list of lenders at www.homepath.com. Shop around before choosing one.

Discounts you can get on car insurance

QSome car insurance companies offer more generous premium discounts than others, I hear. But is shopping for them really worthwhile?

A Could be. For instance, medical association members insured by the Automobile Club of Southern California can get a premium reduction of up to 14 percent. The organization also offers various other discounts, such as 25 percent for most policies covering two or more vehicles; 20 percent for drivers with no serious violations or accidents in the past three years; 18 percent on theft coverage for cars equipped with electronic locators; and 7 percent for owners who insure their home as well as their car with AAA (maximum discounts don't always apply).

When shopping for a new policy, find out what discounts you may benefit from and compare the adjusted premiums. For more ways to save on car expenses, see "Keep your car from eating your cash," Jan. 25, 2002.

Insuring a CD from a broker

QI asked my broker to place some cash in a bank certificate of deposit for me. The CD is in the firm's name and is federally insured. But does the insurance cover me?

A Maybe. You're fully covered if the account title shows that the broker is an agent or custodian on your behalf. But if it doesn't and the broker has additional accounts in the same bank, all of them would be covered for $100,000 in total, so you'd collect just a proportionate share of that amount if the bank fails.

Be sure to check not only whether your account is fully protected, but the name of the bank in which it's located. The reason: The $100,000 insurance limit is per individual depositor at a bank, not per account. You should therefore avoid opening another account or CD in any of its branches, if your total could exceed that figure.

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

2002;17:116.