Ask Liz Weston

Get smart with your money

Q&A

Q&A: When selling a vacation home, here are the taxes to expect

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Dear Liz: I am one-third owner of a vacation house. My siblings own the other two-thirds. We inherited the house from a parent about 10 years ago. I want to sell my third to my siblings, who are willing and able to buy it. Can I do anything to avoid capital gains? Would it make a difference if I sell my interest over several years?

Answer: Vacation homes aren’t eligible for the tax break that allows people to exclude up to $250,000 in capital gains from their income when they sell their primary home. If the property was used full time as a vacation or second home, rather than as a rental, it’s also not eligible to be swapped for another property in a 1031 exchange. (These exchanges allow investors to defer capital gains on real estate investment properties.)

Selling your share of the property over time won’t eliminate the capital gain, but it would spread out the tax bill. Discuss your options with a tax pro to see which approach makes the most sense.

Q&A: How delayed Social Security retirement credits work

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Dear Liz: I just got off the phone with the Social Security folks and they told me the 8% delayed retirement credit is based on your benefit at full retirement age, rather than an 8% increase every year based on the previous year’s amount. So, if my full retirement age benefit was $3,000, my benefit increases $240 each year, not $240 the first year and $259 the second year and $279.94 the third year. Is that your understanding?

Answer: Yes. Delayed retirement credits don’t compound. If there are three years between your full retirement age and age 70, when your benefits max out, you will get 24% more than if you had applied for Social Security at your full retirement age.

Q&A: Whether to close elderly mom’s CDs

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Dear Liz: I have the power of attorney for my 92-year-old mother, who has dementia. She has numerous financial accounts including money market, checking and savings accounts and certificates of deposit. When she passes, would it be easier to settle her estate if I start closing her CDs now and put that money into, say, her money market? I am the sole beneficiary for all of this.

Answer: If your mom has multiple accounts at different institutions, then consolidating those accounts now can save time and hassle later. You’ll want to review the rules for FDIC insurance, though, to make sure her accounts would remain adequately covered.

There’s probably less urgency if all her accounts are already at the same institution and under FDIC limits. Closing CDs prematurely could mean losing some interest, which may not make sense unless she urgently needs the money.

If you haven’t already, consider checking in with an estate planning attorney who can give you suggestions about what you can do now to ease the transition later.

Q&A: Don’t close that credit card

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Dear Liz: I’m debt free with a comfortable income and excellent credit. I just got a new cash-back credit card. I have three other credit cards, including one affiliated with a retail chain that I no longer use. Should I close the retail chain card so I only have three cards? Should I have fewer?

Answer: More is often better when it comes to your credit scores. The scoring formulas may temporarily drop a few points when you apply for a new card, but having at least four active credit accounts can help you achieve and keep high scores.

The formulas won’t punish you for having too many accounts or too much available credit. You could get dinged, though, if you use too much of that credit at one time. To avoid that, try to keep your balance on each card below 10% of its available limit.

Q&A: Establishing credit without debt

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Dear Liz: My wife and I are retired. We have always paid our credit card balances in full each month and have zero debt. A banker recently advised us to establish credit and make timely monthly payments in order to maintain a high credit rating in case we need to borrow in the future. I feel uncomfortable taking money from our investment portfolio to service debt, but I also wish to maintain our high credit rating.

Answer: You don’t need to take on debt or carry credit card balances to have good credit scores. Using a few credit cards lightly but regularly is enough.

Taking out an installment loan can help boost your scores if you’re trying to repair troubled credit. You also may need an installment loan on your credit reports if you want the highest scores possible. But the highest possible scores only give you bragging rights, not better rates and terms on borrowing.

If you’re concerned about maintaining your credit, consider monitoring at least one of your scores. Your bank or one of your credit card issuers may provide a free score, or you can sign up on one of the many sites that offer them. That will give you a better idea of how lenders view you as a credit risk and can help you see which behaviors help and hurt your scores.

Q&A: Social Security spousal benefits

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Dear Liz: I qualified for Social Security and receive a benefit. My wife did not work long enough to get a benefit, yet she receives a small amount each month. What is this from? What happens to it at her death?

Answer: Her benefit is probably a spousal benefit, which is based on your work record. Spousal benefits can be up to 50% of what you would have received at full retirement age. If she started benefits before her own full retirement age, the amount would be reduced to reflect that early start. Her benefit will go away when one of you dies, and the survivor will receive an amount equal to your benefit.