Vacation Properties and Income – Part 2

September 14, 2009

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

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Vacation Properties and Income – Part 1

September 10, 2009

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.


Simple Truths

September 8, 2009

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.


Keeping Your Emotions in Check…

September 3, 2009

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.


How Are Your Spending Habits?

August 18, 2009

The Propensity to Consume

Most People and most societies consume what they can. Americans are notoriously short-sighted, as demonstrated by a low personal savings rate by international standards. There could be many explanations, from a standard of affluence that has distanced us from the struggle for mere survival, to our propensity to invent and create that places a premium on spending whatever money we have in order to create more. We are the consumer society. Just look at the ads in magazines or newspapers and calculate the percentage of them that sell what for most people are luxuries.
You may be surprised to find that you are guilty of a habit that dooms you to never having money. Some people who constantly feel money pressure buy themselves little treats or rewards, in part because they never have the money to buy themselves what they really want. But it’s precisely that accumulation of “little” expenses that prevents them from getting ahead. Many don’t even realize they do this. The only way to find out is to keep track of what you spend. Do it for a week or a month. Try to remember each expenditure, no matter how small. Record everything in a little notebook each day. Add them up in different categories at the end of your test period: food and drink, entertainment, utilities, gifts and so forth. Pay particular attention to the small expenditures on unnecessary items and see how they accumulate over time.


Tax Laws and How They Can Benefit

August 13, 2009

Sharing Your Wealth

The tax laws of the United States encourage gifts by granting tax deductions for them in many cases. If individual citizens voluntarily help meet our country’s needs, their contributions reduce the responsibility of the government. Many would also argue that private support of charitable activities is more efficient than public support.
Due to the tax treatment of charitable contributions, individuals may realize not only immediate tax benefits but also advantages in terms of after-tax cash flow and the size of the estate they may pass on to their heirs. Gifts to charity during one’s lifetime or at death, if structured properly, will reduce the estate tax liability. An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limitations.


Tips When Planning Your Finances

August 11, 2009

Don’t Sell Yourself Short

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher—and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.