Ask Liz Weston

Get smart with your money

Q&A

Q&A: IRS and selling a home

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Dear Liz: How does the IRS know you sold your house? If you sell and buy another home, must you report it? Most folks I know sell, then buy a more expensive house. Seems like lots of moving parts for the parties, including the IRS, to have to track.

Answer: Not really. The title company or attorney handling the closing on a property sale typically generates a Form 1099 with the sales price of the home. The seller gets a copy and so does the IRS. Sellers who “forget” to account for the proceeds on their tax returns will soon get a reminder from the IRS, which typically just tacks the sale amount onto the sellers’ income and demands its cut, along with penalties and interest.

Q&A: The Ins and Outs of Trusts

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Dear Liz: I liked your answer to the person who wanted to ensure a son from a prior marriage got an inheritance. You mentioned creating a trust so the surviving spouse can get income from the assets but then the son would inherit when that spouse dies. However, what’s to prevent the surviving spouse from using up all the funds so that the son is left with nothing after all?

Answer: These trusts typically put restrictions on how much the surviving spouse would be able to access and in what circumstances. If the surviving spouse is the sole trustee, of course, the temptation to ignore the rules could be great. Alternatively, the ultimate inheritor or a third party can be named as trustee or co-trustee.

But there’s no getting around the fact that the trusts create a conflict between the survivor and the ultimate inheritor. The survivor typically wants as much income as possible from the trust while the inheritor wants the trust to be left alone to grow.

Another issue is taxes. Assets in the trust will get a step-up in tax basis when the first spouse dies, but not when the surviving spouse dies.

Often, the best way to make sure someone gets an inheritance is to make an outright bequest rather than putting the money in a trust. If a surviving spouse needs income from the assets to make ends meet, though, a trust with a responsible trustee can help ensure the ultimate inheritor gets the inheritance that was intended.

An experienced estate planning attorney can help you sort through the available options and make the best plan for your loved ones.

Q&A: How to get out from under a crushing reverse-mortgage debt

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Dear Liz: Our elderly father took out a reverse mortgage in 2010 with the goal of getting a $1,000 monthly income stream. Fast forward to today: Dad has passed away, and our mom is still alive at 97. The payback amount of the mortgage has ballooned to $360,000. Because it’s an adjustable rate mortgage, the rate is increasing with the inflation rate. We’re being told that this is all legal, but it seems like usury to me. None of us children have enough cash to pay off the reverse mortgage, so it will continue to go up stratospherically each and every month. The entire balance will become due if she leaves her home or passes away. Do you have any suggestions?

Answer: Reverse mortgages allow borrowers to tap their equity without having to make payments while they remain in the home. But the amounts they borrow accrue interest and, as you’ve seen, the debt can grow substantially over time.

If your mother dies or moves out, the lender will demand payment within 30 days. It may be possible to extend the deadline for up to six months, according to the Consumer Financial Protection Bureau. If you don’t have the cash to pay off the loan, you could try to get a mortgage or to sell the home to pay the debt. If you sell it, you would need to clear enough to pay off the debt or at least get 95% of the home’s appraised value. Another option — especially if there’s little or no equity left — is to simply turn the house over to the lender. You won’t be on the hook if the mortgage balance exceeds what the home is worth.

Q&A: Taxes on home sales

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Dear Liz: I thought that if you occupied a home as your principal residence for two of the last five years that you could exclude capital gains of up to $250,000 if single or $500,000 if married. Someone recently told me that this has been changed to a pro-rata calculation.

Answer: That someone was wrong. The pro-rata calculation applies to people who have not owned and lived in the home for at least two years but who meet other criteria for a partial exemption. The percentage of gains you can exclude from your income is based on the percentage of the two-year requirement you fulfilled.

Let’s say you had to sell the home after a year because your place of employment changed to one at least 50 miles away. You could exclude capital gains of up to 50% of the exemption amount — $125,000 if single or $250,000 if married — from your income.

Q&A: Roth IRA withdrawal rules

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Dear Liz: In a recent column you mentioned that you can take money out of a Roth IRA at age 59½ without a penalty. I believe a Roth IRA must be in force for at least five years before you can take money out, regardless of age. Is this correct?

Answer: At any time and at any age, you can withdraw an amount equal to what you contributed to a Roth IRA. So if you’ve contributed $5,000 a year for four years to a Roth, you can withdraw $20,000 without worrying about taxes or penalties.

The five-year rule kicks in when you start to withdraw earnings. You can avoid both taxes and penalties on these withdrawals if the account was established at least five years ago and you’re 59½ or older. If the account isn’t at least 5 years old, you must pay taxes on the earnings withdrawn but don’t have to pay the usual 10% penalty if you’re 59½ or older.

A five-year rule also applies to Roth conversions. Each conversion or rollover you make is subject to a separate five-year waiting period.

Q&A: The thought of ending up old and alone can be terrifying. It doesn’t have to be that way

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Dear Liz: My wife and I have no children to take care of us in our old age, and I am scared to death regarding what will happen to the surviving spouse when one of us dies or we become incapacitated. We are 69 and 67 respectively and I think a lot of “boomers” are facing this issue. Any thoughts?

Answer: Consider getting a copy of the book “Essential Retirement Planning for Solo Agers: A Retirement and Aging Roadmap for Single and Childless Adults” by certified retirement coach Sara Zeff Geber. The NextAvenue site also has a wealth of information on how to prepare for aging and incapacity if you don’t have kids or don’t have ones you can rely on.

Geber provides far too much valuable information to summarize here, but one important strategy is to create a strong social network. Not only can this combat social isolation and loneliness — which are as dangerous to your health as smoking — but these folks can help look out for you and vice versa.

If your social circle is small or you’re out of the habit of making new friends, consider activities that put you in contact with others such as volunteering, taking classes or joining exercise groups. Also check out the Village to Village Network, a nonprofit that helps people age in place by encouraging groups of neighbors to help one another with rides, services and activities.

Living in close proximity to others and in areas with robust social services also can make a huge difference for solo agers. Another option, if you have the means, is to consider a continuing care retirement community that allows independent living to start, with assisted living and sometimes nursing home care as needed.

Every adult needs an advance healthcare directive, such as the free ones at Prepare for Your Care. These documents allow someone you trust to make health decisions if you should become incapacitated. It’s OK to name your spouse, but you also should have at least one and preferably two or more backups. Filling one out can help you think deeply about the people currently in your life you can trust with this task, and may encourage you to deepen those ranks if they’ve gotten a little thin.