Money Management Q&As

November 18, 2005



Watch out for this new pitch

Q. My broker says I'd probably do better long term by investing in a portfolio of mutual funds that have sales charges instead of no-load funds-which won't pay him any commissions. To support his claim, he sent me what he called a "Monte Carlo simulation." Is this something new?

A. The Monte Carlo method isn't new, but your broker's ability to use it as a sales tool is. Such simulations employ software to analyze the theoretical results of various investment strategies and predict their relative probabilities. In the past, brokers weren't allowed to project portfolio performance or returns. But the NASD, which regulates the securities industry, modified this prohibition last year, with the SEC's blessing. However, the broker must explain the key assumptions underlying the projections, disclose reasons for selecting particular securities, and state that other investments not considered may have characteristics similar or superior to those being analyzed.

Q. I want to sell my house in the suburbs and move to an apartment in the city. I like a co-op I've seen, but I don't know much about how co-ops work. What are the main points to keep in mind?

A. Be aware first of all that you'll be buying stock in a corporation, not a piece of real estate. For that reason, financing may be harder to get and more expensive than an ordinary home loan. As a shareholder, you have the right to permanently occupy a specific apartment, but the corporation's bylaws and the board of directors control what changes you can make in it, whether and how long you can sublet it, and to whom you can sell.

A monthly carrying charge or maintenance fee will cover your prorated share of the co-op's operating expenses and a reserve for repairs and replacements (possibly including appliances originally installed in your unit); fire insurance premiums (your personal property must be insured separately); real estate taxes; and loan payments, if there's a mortgage on the building.

Although you don't pay the real estate taxes and the co-op's mortgage interest directly, you can deduct your share on your income tax return, along with the interest you pay on your loan. If you sell your co-op residence at a profit, you'll qualify for the capital gains tax exclusion on the same basis as the owner of a single-family home.

If you trade in a hybrid car

Q. I claimed a $2,000 tax deduction for a hybrid car I bought in 2003. If I trade it in for a new hybrid this year, can I claim another deduction?

A. Yes, if the IRS has certified that the model meets the clean-fuel standard. Vehicles that qualify include hybrid models in these lines: Ford Escape; Honda Accord, Civic, and Insight; Lexus RX 400h; and Toyota Highlander and Prius. If first used in 2005, the deduction is $2,000; in 2006, it will fall to $500.

Disposing of your former car in less than three years could cost you part of your earlier deduction, but only if you know it has been or will be modified so that it can no longer use a clean-burning fuel or fails to meet emissions standards.

Should you jeopardize your financial privacy?

Q. As part of a financial checkup in connection with a new home mortgage loan, I've been asked to sign Form 4506 requesting the IRS to disclose my prior tax returns, but to leave the signature date blank. What's behind this?