THE TAX PROPHET (www.taxprophet.com): Frequently Asked Questions:  October, 2001 -- Print Version

• Sale of residence held in joint tenancy
• Using an IRS for a vacation residence
• Bank mistake regarding IRS contribution
• Using the AMT credit in future years

Q1:  In one year, I bought and sold a principal residence in California. I owned it in joint tenancy with my fiancé. My understanding is that each Joint Tenant owns a 100% ownership interest in the asset. How do we apportion the gain?

A1:  Two people, holding property as joint tenants, own 50% each, since under California law, each tenant has the right to sever the joint tenancy and become a tenant in common as to a 50% interest. Thus, each of you would report 50% of the gain on your respective tax returns. If you qualify for the residency exemption, then each of you would have an exemption equal to $250,000 on your respective share of the profits from the sale of your home.

Q2: May I use my IRA as a 1st time home buyer for a vacation property? Are there penalties for this kind of withdrawal?

A2:  A qualified first-time homebuyer distribution is a distribution (or a part of a distribution) that is used to pay "qualified acquisition costs.  You must use IRA money for a principal residence and not a vacation home. " with respect to the "principal residence" of a "first-time homebuyer" who is the IRA owner, the IRA owner's spouse, or any child, grandchild, or ancestor of the IRA owner or the IRA owner's spouse Section 72(t)(8)(A). The withdrawn money is taxed as ordinary income to you. If you do not meet this exception, the withdrawn money is subject to a 10% penalty for early withdrawal in addition to ordinary income taxes.

Q3:  My bank classified my IRA contribution as 2001 instead of 2000. The bank is now refusing to change it. Is there anything I can do?

A3:  What evidence do you have that the contribution was intended for 2000 (such as a cover letter or notation on your check)? If you have such evidence, take the deduction in the correct year on your tax return. If you are audited, you can explain that your bank made the mistake and refused to correct it.

Q4:  What is the treatment, for AMT purposes, of shares (received through the exercise of incentive stock options) that are sold in a subsequent year, after they have declined in value since exercise. Is the AMT credit in future years limited to $3,000/year?

A4:  There is no $3,000 per year limitation on the AMT credit. The AMT credit may be applied against future regular capital gains tax and, to the extent a taxpayer is not in the AMT, up to difference between the regular tax and the AMT. Thus, if you have an AMT credit of $50,000, you can only use that credit in two instances: (1) to offset future capital gains and (2) in a year in which your regular tax exceeds your AMT, to the extent of such difference. For example, if your regular tax is $45,000 and your AMT is $37,000, you can use $8,000 of your AMT credit.