Ask Liz Weston

Get smart with your money

q&a

Q&A: Investment property

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Dear Liz: Eight years ago, we bought a fixer-upper in an up-and-coming neighborhood. Now it’s mostly fixed up, and property values have soared. We would like to borrow against the equity to buy a beach house we could use and also rent out. This would be a long-term investment. We already own one rental property that is turning a small profit. Managing it allows me to bring in much-needed extra income while staying home with my children. I want to increase that income with a beach house we can also enjoy. Is this a smart use of home equity?

Answer: It may be. You’ve got some experience as a landlord, so you understand what’s involved in maintaining and repairing a rental property and dealing with tenants. A property that’s split between personal use and rental is somewhat different, since you won’t be able to deduct all the expenses as you could with a full-time rental. The expenses have to be divided proportionately, and you can’t deduct rental expenses in excess of the rental income you get. IRS Publication 527, Residential Rental Property, offers more details, or you can talk to a tax pro (which you should have, given that landlords can face some complicated tax situations).

Your first task is to ensure the beach house is in an area that allows short-term rentals on the scale you’re anticipating. Not all communities do. Some don’t allow “vacation rentals” at all, while others limit the amount of time that the property can be rented. Those that allow short-term use may require annual licenses and assess taxes or fees on the rentals, which are costs you’ll want to factor in before you buy.

Your next step, if your goal is to generate income, is to find a property that is “cash flow positive” from the start, with expected rents more than covering expected costs. Obviously, though, you can’t predict everything, which is why it’s essential to have a fat emergency fund for unexpected repairs or greater-than-anticipated vacancies.

Another smart move would be to lock in your interest rate if you don’t expect to pay back what you borrowed against your house within a few years. That means a home equity loan with fixed rates rather than a line of credit with variable rates. You put your home at risk when you borrow against it, so be conservative and lock in predictable payments.

Q&A: Tax credit for Roth IRA contributions

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Dear Liz: You told a reader that “contributions to a Roth are never deductible.” This statement is a common misconception and is not correct. You can get a tax credit for Roth IRA contributions as long as you fall under the income limits and itemize on your taxes. The credit phases out at $30,000 for singles and $60,000 for married couples.

Answer: A credit is different from a deduction, but thank you for pointing out a tax benefit that many people don’t know exists.

This non-refundable credit, sometimes called a Saver’s Credit, can slice up to $1,000 per person off the tax bill of eligible taxpayers. The credit is available to people 18 and older who aren’t students or claimed as a dependent on someone else’s return. The lowest income taxpayers — those with adjusted gross incomes under $36,000 for marrieds filing jointly or $18,000 for singles in 2014 — can get a tax credit of 50% of up to $2,000 per person ($4,000 for married couples) contributed to retirement plans. Those plans can include traditional or Roth IRAs, 401(k)s or 403(b)s, 457(b)s and SIMPLE IRAs, among others. The credit drops to 20% and then 10% before phasing out. The average amount saved isn’t spectacular: The IRS said credits averaged $205 for joint filers in 2012 and $127 for single filers, but every bit helps.

One of the problems with this tax break, besides so few people knowing about it, is that many low-income people don’t owe income taxes, so they have nothing to offset with this credit. Another issue is that taxpayers need to file a 1040 or 1040A and use Form 8880 to claim it. Low-income taxpayers often use the 1040EZ form, which doesn’t allow them to claim the credit or alert them that it exists.

Q&A: Surviving on Social Security Disability

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Dear Liz: I’ve been on disability for over 10 years, and I currently receive $1,527 a month in Social Security Disability Insurance. My rent starting in March will be $1,400. I’m not opposed to moving, but after checking literally thousands of listings, I found that what I’m paying is not unusual for my area. I’m living on savings now. I’d like to have a job but am hard-pressed to find work. What should I do?

Answer: You don’t have to do anything if you have enough savings to last the rest of your life. Assuming that’s not the case, you need to do something to dramatically lower your cost of living.

You may qualify for housing assistance. You can use federal government sites such as Benefits.gov or HUD.gov to explore your options, or search for the name of your community and “rental assistance programs.”

You may discover that your low income is still too high for the available programs or that there’s a massive waiting list. If that’s the case, you still have options.
If your disabilities allow, you could earn low or even free rent by working as an apartment manager, a companion to an elderly person, a babysitter for a family with young children or a caretaker for a home or estate.

If your apartment is in a desirable area, you may be able to rent it out a few days a month on Airbnb, Homeaway or another vacation rental site to offset your cost. (Check with your landlord first.)

You could look for a roommate or other shared housing in your community, or consider moving to a less expensive area. You may need to move only a few miles to find a more affordable place, or you may have to consider transferring to a different city or state.

If you’re willing to be truly mobile, you could do what some retirees on limited incomes do and live full-time in a recreational vehicle. Some get jobs as camp hosts or other campground workers in exchange for a free site.

In general, you shouldn’t pay more than about 30% of your gross income for housing. Limiting your rent to 25% is even better, since it will give you more wiggle room to afford the rest of your life.

Q&A: Financial advice and family

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Dear Liz: Regarding the brother who has the financially irresponsible sisters, in general I agree with you about not pestering people who don’t want advice. But with family, it’s different. It is quite obvious to me and other readers that this man is concerned about his sisters coming to him later in life even if he didn’t state that in his letter. Telling them he won’t help when they come to him later in life (and they will) isn’t realistic. Maybe his continual pestering will finally make them come to their senses.

Answer: If you’ve had any problems in your own life — you needed to lose a few pounds, say, or stop smoking — think about how you would have received the “continual pestering” of a sibling on the issue.

Announcing to his sisters that he won’t help them financially before they ask may have an unintended side effect. If Mom has any money left when she dies, she may well allocate more of it to the sisters under the assumption that they’ll “need” it more because their mean old brother won’t help them.

Q&A: Bonus taxing

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Dear Liz: You recently answered a question from someone who wondered whether to pay off tax debt or credit cards with a $10,000 bonus. You asked why the person planned to put only about half the bonus toward debt instead of all of it. I think I know the answer. A bonus is considered taxable income, so someone in a high tax bracket likely would net only about half of the gross amount.

Answer: That’s a good point. Many people fail to factor in the tax bite when they get a windfall or cash in a retirement plan. The more money you make, the more painful that bite can be.

Q&A: Mistaken address leads to debt collection

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Dear Liz: A debt collector says I owe a small debt from a store credit card I opened about six months ago. The wrong address was on file, so I hadn’t received any documentation at all. After opening the account I had called the store customer service line to arrange a payment, but the representative told me I had to wait for my account number and card in the mail. It never showed up, obviously, because of the wrong address issue. I understand that it was still my responsibility to pay this, but I called the store and then the bank that issued the card and got no response. Do I have any right to dispute the collection or at least catch a break?

Answer: The Fair Credit Billing Act requires that when accounts are opened, lenders send written notice about the account holder’s right to dispute errors, said credit expert Gerri Detweiler. Lenders are also supposed to send you statements when your account has activity (such as a balance due).

You could make the argument that the lender violated federal law by sending the information to the wrong address, Detweiler said, and that your credit scores have suffered as a result.

Yes, you should have contacted the store again after the card failed to arrive, but the lender should have fixed the problem and called off the collector once it was notified.

You can file a complaint with the Consumer Financial Protection Bureau at http://www.consumerfinance.gov and it will contact the lender to try to resolve the dispute. You’ll be able to log into the CFPB site to track the progress of its investigation.

You also should get copies of your credit reports and dispute any negative information related to this account, including any collections activity, said Detweiler, who writes about credit and debt at Credit.com.

Should the lender balk at removing the derogatory information from your credit reports, you can hire a consumer law attorney (referrals from http://www.naca.net) to press your case.