Remarrying After a Tax-Avoiding Split

QUESTION: Can you handle one last question on the $125,000 profit exemption allowed senior citizens when selling a home? You have already said that if a couple divorces but continues to live in their home, each spouse is entitled to claim, upon sale of the house, the full $125,000 exemption, instead of sharing the single $125,000 exemption that they would be entitled to if they were still married. What I am wondering is: How long after the sale could the couple remarry?--E. S.

ANSWER: The Internal Revenue Code does not address the strategy you suggest. But the law, as it is currently written, does permit each divorced spouse to claim a full $125,000 profit exemption, allowing them to shelter a total of $250,000 in property appreciation. The only requirements are that both sellers be at least 55 years old and have lived in the house for three of the last five years. (In the case of a married couple, only one spouse must be 55 or older.)

When can this loving, but profit-sheltering, couple remarry? For starters, they wouldn’t want to do it in the same year they were divorced, because that would nullify the whole strategy. And they probably wouldn’t want to remarry too soon after divorcing because the IRS does pay attention to such ploys.

Our experts recommend, if your heart is absolutely set on this strategy, that you wait a decent interval--three to five years--before tying the knot again. They further suggest that you be extremely careful when offering your reasons for remarrying. Something like “it’s better the second time around,” is probably the safest explanation.

Report Property Sale as Installment Deal

Q: I sold my rental property this year and was paid 50% of the sales price when escrow closed and took back a note for the remaining half. The note will be repaid in five years. Am I allowed to report this transaction as an installment sale on my state and federal income tax returns, and, if so, will I be charged interest on the amount of the note?--J. G.

A: With one possible exception, you are free to report the transaction as an installment sale. The only potential roadblock would arise if you took an accelerated depreciation on the property. In that, case you would have more gain to recognize--and pay taxes on--than otherwise. If this is your situation, you should consult your accountant or tax attorney. If you depreciated the property in the usual way, you may report half of your gain this year and half when the note is repaid.

Unless the sale price of the property was more than $5 million, the IRS will not require you to pay interest on the second half of the gain you will recognize in five years.

How Get the Most Out of Social Security

Q: All your recent discussion about Social Security benefits got me to thinking. Can my wife retire at age 62 on her own small Social Security and then, at age 65, switch over to the higher benefits as my spouse?--C. S. C.

A: Yes. At age 65, your wife is entitled to spousal benefits equal to 50% of your benefits, regardless of the amount she would be entitled to on her own account and regardless of the fact that she started taking her own benefits at age 62. However, if your wife decided to enroll for spousal benefits at age 62, she would receive 20% less than she would get if she waited until she was 65. By taking benefits on her own account at age 62, she preserves her right to receive full benefits as your spouse at age 65.

It’s OK to Transfer Your IRA Account

Q: When I retired, I rolled over my pension distribution into an individual retirement account, and over the years, the value of the account has grown to significantly more than $100,000. I am aware that the amount in excess of $100,000 has no federal insurance protection, so I would like to put this excess into another IRA at a different institution where I would be entitled to the insurance coverage. My accountant has expressed concern that the IRS might view this move as a distribution of the account and subject it to income taxes. My accountant isn’t sure, and I can’t seem to get a straight answer from the IRS.--J. C. H.

A: You have nothing to worry about. The IRS allows you to transfer funds from one IRA to another without paying taxes. You can make this transfer in one of two ways:

You may ask the institution holding your account, your trustee, to make the transfer to another institution of your choice. This is called a “trustee to trustee” transfer, and you are allowed to make as many of these transfers as you want without any tax penalty, so long as you do not withdraw any of the funds for your own use.

You also may withdraw any amount from your IRA and redeposit it in another IRA within 60 days without facing a tax penalty. This is called a roll-over, and you are allowed one such transaction a year without tax penalty. What you do with the money during the 60 days is your business, and if you redeposit the money within the allotted time, no questions are asked and no tax is assessed.

Although it is risky, some people have been known to tap their IRAs to get themselves over a temporary cash crunch. This strategy can work if you are virtually 100% certain that you can redeposit the full amount within the 60 days. However, if you miss the deadline, even by one day, you will have to pay income taxes, and perhaps an early withdrawal penalty, on the account’s proceeds.

Carla Lazzareschi cannot answer mail individually, but will respond in this column to financial questions of general interest. Please do not telephone. Write to: Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.