Q&A: How a ‘like-kind’ 1031 exchange can help you defer real estate capital gains taxes

Dear Liz: My husband and I are selling a commercial property for $600,000 and we have capital gains questions. Our Realtor said that we have 90 days to buy another property but suggested we don’t make a purchase due to the state of the economy at this time. We are looking for any suggestions to lessen our capital gains. Do you have any suggestions that we could look into or articles to read?

Answer: Your Realtor is referring to what’s known as a “like-kind” or Section 1031 exchange. These exchanges allow people to defer capital gains taxes when they sell commercial, rental or investment real estate as long as the proceeds are used to purchase similar property.

Section 1031 exchanges happen all the time, in all sorts of economic conditions, so your Realtor’s attempt to dissuade you based on “the state of the economy” is a bit odd. Also, like-kind exchanges don’t have to be completed in 90 days. Owners have 45 days to identify potential replacement properties and a total of 180 days to complete the transaction. There are a number of other rules you must follow, so you’ll want to use companies known as exchange facilitators that specialize in handling these transactions.

Your first step, though, should be finding a qualified tax professional. You’ve just experienced what can happen when you turn to non-tax professionals for tax advice.

While your desire to educate yourself is laudable, and you certainly can find books about taxes at your local bookstore, there’s no substitute for consulting an experienced tax pro who can give you personalized advice.

Q&A: How to avoid Medicare late enrollment penalties

Dear Liz: I am 65, still working and have health insurance through my employer. I have not enrolled for Medicare and have been told I do not need to. I plan to once I retire. There is a passage in my Social Security statement that says, “Because you are already 65 or older, you should contact Social Security to enroll in Medicare. You may be subject to a lifetime late enrollment penalty. Special rules may apply if you are covered by certain group health plans through work.” I have tried to research further through the Medicare website but can’t find a clear answer about whether or not I am OK not enrolling at this time.

Answer: If your employer has 20 or more employees, then you’re fine for now. When you stop working for that employer, you’ll have eight months to sign up for Medicare without owing penalties.

If you want your Medicare coverage to start when your job-based coverage ends, though, you should sign up a month before you retire. Similar rules would apply if you were covered by a spouse’s workplace health insurance plan. As long as your spouse is still working for the employer that provides the coverage, you can avoid permanent Medicare penalties.

If your employer has fewer than 20 employees, however, you may be required to sign up for Medicare when you’re first eligible. Check with your employer.

Q&A: Newlyweds’ home sale taxes

Dear Liz: You recently wrote about how home sales are taxed but I have a question. My son was single when he bought his condo. He is now married and planning on selling it. Does he qualify for the $250,000 exclusion or the $500,000 exclusion?

Answer: As you know, the exclusion allows home sellers to avoid capital gains taxes on a certain amount of profits as long as they owned and lived in the home at least two of the previous five years. With married couples, only one spouse needs to meet the ownership test but both must meet the “use” test. In other words, both your son and your son’s spouse must have lived in the home for at least two years before the sale for the couple to qualify for the $500,000 exclusion. The couple must file a joint return in the year they sell the condo, and neither spouse can have excluded gain from the sale of another home during the two-year period before selling this home.

Q&A: Credit scores and usage

Dear Liz: Thanks for your recent column about how credit scores react to heavy credit card usage. We pay our credit cards in full each month but recently we had big charges on three cards for vacations, home supplies and other purchases. I am the primary account holder on all three cards and my credit scores tanked! I even got email warnings about it from my credit monitoring service.

I have paid off two of the cards and will pay off the third one soon. My husband has one credit card in his own name that he occasionally uses and he is an authorized user on the others. I have always been the fanatical financial partner so he thinks it’s funny he has great scores and I look like a loser! Good thing we were not planning to do a house purchase or refinance the mortgage.

Answer: Pretty soon your husband will have to find something else to tease you about. Your scores are likely to return to their previous levels once the high balances are paid off and you return to your normal spending habits.

Many people are surprised by how dramatically credit scoring formulas react to the amount of available credit they’re using. But this knowledge can help you the next time you’re planning to get a major loan.

For example, you could throttle back your credit card usage starting a couple of months before your application. Alternatively, you could make weekly payments instead of monthly ones to ensure the balances reported to the credit bureaus, and used in your scores, are as low as possible.

Another approach is to pay off your balance a few days before the statement closing date, since the balance on that date is the one that’s typically reported to the bureaus. (If any charges show up after you’ve paid off the balance, you’ll need to make a second payment before the due date to avoid late fees.)

Q&A: How to walk away from timeshare maintenance fees

Dear Liz: We have owned a timeshare since 2007. It’s paid in full. We are not using it anymore and would like to stop paying the annual maintenance fees. Help! Selling or giving it away is not easy. Should we just stop paying the maintenance fees? At 71, how bad could the impact be?

Answer: Timeshare developers have different policies about pursuing unpaid maintenance fees. If the developer turns your account over to a collections agency, your credit could suffer for up to 7½ years.

Before you simply stop paying, consider first asking the developer to take back your timeshare. Only a few timeshare developers have formal programs to accept surrendered timeshares, but many will consider doing so as long as the timeshare is paid off. Ask to speak to the person who handles such surrenders or “deed backs.”

If the developer resists, you have a few other options. Sites such as the Timeshare Users Group and RedWeek have marketplaces where you can list your timeshare. You may have to offer to pay the maintenance fees for a year or two as an incentive to get someone to take the timeshare off your hands. Another alternative is to rent your timeshare, since you might be able to cover the maintenance fees that way.

If someone contacts you offering to help sell your timeshare, it’s probably a scam. You can find legitimate brokers who facilitate sales by contacting the Licensed Timeshare Resale Brokers Assn., but these professionals typically only handle sales at high-end resorts.

Q&A: Credit rating after mortgage payoff

Dear Liz: We are recently retired and will own our home free and clear in about six months. Will not having regular mortgage payments dent our credit ratings? If so, what can be done as a good substitute?

Answer: Your credit scores may dip after you pay off your mortgage, particularly if you don’t have another installment loan such as a vehicle or personal loan. To get and keep the highest credit scores, you typically need both installment loans and revolving accounts, such as credit cards.

The good news: You don’t need the highest credit scores to get the best rates and terms from lenders. Using credit cards lightly but regularly can help you maintain good scores without taking on debt.

Q&A: Credit freezes

Dear Liz: You recently suggested a credit freeze. I agree that’s a good idea, and probably the only good way, to try to protect your credit.

But I’ve tried to periodically unfreeze my credit reports and that rarely goes well. The banks won’t tell you which credit bureau or bureaus they use to check your credit, so you have to temporarily thaw your reports at all three. This weekend, only one bureau worked well. At another, I was able to sign on but got a message the site was temporarily unable to access my information. The third didn’t recognize any of my possible usernames, so I tried my Social Security number and date of birth, which it also didn’t recognize. I’m SURE I don’t have those wrong, so I’d say part or all of their database is offline. More than likely I’ll be able to sort this out on a weekday when the bureaus staff their phones, but so far, I’ve worked on unfreezing my credit for two days and only one of the three services responded correctly.

Answer: Freezing and thawing your credit reports is certainly easier and faster than it used to be — plus, these services are now free by federal law. But as you’ve learned, you need to keep careful track of the credentials associated with your accounts at each credit bureau, including any login IDs, passwords and personal identification numbers.

You can write this information down and keep it in a secure location, but also consider using a password manager. These secure software programs allow you to create unique credentials for each site you visit. Given the prevalence of database breaches, it’s essential that you don’t reuse usernames and passwords. The programs also can help you change your passwords regularly, which is also important in keeping your information secure.

Q&A: Waiting to collect Social Security

Dear Liz: I understand your suggestion about waiting until you are 70 to apply for Social Security because you’ll get a larger amount. However, I applied at 62 and no matter how much more I would have received at 70, I would never recoup an amount equal to what I received. My husband chose to wait and died before he reached 70.

Answer: If your husband’s benefit was larger than your own, then his decision to delay was a real gift to you.

When one member of a couple dies, the survivor gets only the larger of the two Social Security benefits the couple used to receive. Losing one benefit can cause a sharp drop in the survivor’s income. That’s among the reasons why financial planners urge the higher earner to wait as long as possible: to maximize the benefit the survivor will have to live on for years or even decades.

If your husband had remained alive, then your early start could have been a mistake. Most people live past the “break even” point where the larger checks you could get from delaying more than outweighed the smaller checks you passed up in the meantime.

Q&A: Capital gains tax

Dear Liz: I am selling my house. After subtracting all selling costs, stepping up the basis for capital improvements over the years, and using the $500,000 capital gains exclusion from the IRS, I will still have a significant capital gains tax due. Does this tax need to be paid via the quarterly estimated tax in the quarter the house closes, or can I wait and pay the capital gains tax with the yearly tax filing?

Answer: If you are the sole owner of the home, then you can exclude up to $250,000 of capital gains from a home sale. If you’re married then the exclusion amount is doubled to $500,000.

Ours is a “pay as you go” tax system, which means you’re supposed to withhold the appropriate taxes as you earn or receive income. If you don’t withhold enough, you can owe penalties. People who don’t have regular paychecks or who experience windfalls, such as your home sale, may have to make quarterly estimated payments to ensure they’ve paid enough to avoid the penalties.

One way to avoid penalties is to make sure your 2022 withholding at least equals your 2021 tax bill, if your adjusted gross income is $150,000 or less. If your adjusted gross income is more than $150,000, your withholding needs to equal 110% of your 2021 tax bill. Another is to pay 90% of your 2022 tax bill. It’s tough to know what your tax bill is going to be before the year ends, though, so most people choose to withhold based on their 2021 tax bill. If your 2022 bill will significantly exceed your withholding, however, you’ll want to make sure you stash the appropriate cash in a safe, FDIC-insured savings account so it’s available when you have to pay Uncle Sam next year.

Q&A: Should you keep paying Medicare premiums if you’re moving abroad?

Dear Liz: We are thinking of retiring to Paris. What would be the repercussions if we stop paying Medicare premiums? We’re concerned about the possibility of returning to the U.S. at some future date and the costs of reinstating it. Do we just pay back the past due payments plus a penalty?

Answer: You wouldn’t make up the missed payments, but you would owe a penalty that would permanently increase your premiums for Medicare Part B, which covers doctor’s visits, and Part D, which covers prescriptions. The penalty for Part B is 10% for every 12 months you were eligible but not enrolled. The penalty for Part D is determined by multiplying 1% of the “national base beneficiary premium” ($33.37 in 2022) by the number of months that you were eligible but didn’t enroll.

Many retirees who plan to eventually move back to the U.S. or make frequent visits opt to keep up their Medicare coverage. Consider discussing your options with a fee-only financial advisor — preferably one who has experience advising would-be expatriates. Another option when you have Medicare questions is to contact your State Health Insurance Assistance Program, which can provide free counseling.