Ask Liz Weston

Get smart with your money

capital gains taxes

Q&A: What to do when your financial advisor isn’t doing right by you

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Dear Liz: My husband and I are in our 80s, living in a retirement community. Our investment account is valued at $550,000. This has to see us through till we die. We have no pension, no other assets. Social Security provides $2,760 a month and we are in the lowest tax bracket. Our financial advisor is using tax loss harvesting “to save us from capital gains tax.” We are both uncomfortable with this. Taking a loss on purpose doesn’t feel like a secure path and should be for people with a long-term future. Should we ask him to stop using this method of trading?

Answer: Tax loss harvesting involves selling investments that have gone down in value to offset some or all of the gains from investments that have gained in value. The point is to reduce capital gains taxes. Since you’re in the lowest tax bracket, however, your federal tax rate on long-term capital gains is effectively zero. It’s hard to imagine how your advisor would justify tax loss harvesting, given your situation.

Go ahead and ask them. The answer should give you some insight into how much your advisor knows, or cares, about your individual circumstances. Obviously, you should halt the tax loss harvesting if there’s no good reason to do it, but you might also want to start looking for a new advisor.

Keep in mind that most financial advisors don’t have to put your best interests first. They can recommend investments or pursue strategies that make them money, regardless of whether the recommendations are the best fit for your financial situation.

If you want an advisor committed to putting you first, you’ll need to seek out one who is willing to be held to a fiduciary standard. Such advisors include certified financial planners, certified public accountants (including those who are personal financial specialists) and accredited financial counselors. A fiduciary would have taken the time to understand your financial situation and then crafted a strategy to best fit your circumstances.

Q&A: Credit for time spent on a DIY home project?

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Dear Liz: My husband remodeled all of the bathrooms in our home. We have receipts for the materials we purchased so that we can reduce our capital gains when we sell our home. Can we claim my husband’s time as labor costs for the home improvements?

Answer: No.

You can add the cost of improvements to your tax basis, which will be deducted from the sale amount to determine your potentially taxable capital gains. But you can’t add to your tax basis the value of your own labor, or any labor for which you didn’t pay.

Q&A: Capital gains taxes

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Dear Liz: My wife owns a house that was separate property before our marriage. She has since fallen ill and needs round-the-clock care. I am selling the house to support this and will net about $250,000 at close. Will we have to pay capital gains taxes, or can I claim a one-time exemption, based upon this not being community property?

Answer: If your wife lived in the property as her principal residence for at least two of the five years prior to the sale, the profit would qualify for the capital gains exemption of up to $250,000 per owner.

People who have to sell their principal homes before they meet the two-year residency requirement may qualify for a partial exclusion if the sale was triggered by special circumstances such as a change in health or employment or “unforeseen circumstances.” You’ll want to talk to a tax pro about whether your wife’s situation qualifies.

Even if the gain is taxable, she may not owe tax on the entire amount netted from the sale. When figuring home sale profit, her basis in the home — essentially, what she paid for it, plus any qualifying improvements — is subtracted from what she nets from the sale.

There’s another way to avoid paying taxes on home sale gains, and that’s to hold on to the property until your wife’s death. At that point, the home would get a “step up” in tax basis to the current market value. An inheritor who sold the home at that market value wouldn’t owe any tax, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting U.S.