- The Washington Times - Monday, January 23, 2006

Q My husband and I own two homes. Our primary home is worth around $400,000, and our second is worth $250,000. We are thinking of selling the second and want to reduce taxes. We paid $63,000 for it in the 1980s and have never rented it. Our plan is to fix up the home, move into it for two years and then sell it. Will this avoid all taxes?

A: You can convert your second home into a primary residence, live in it for two years and avoid as much as $500,000 in capital gains. My question is, are you sure you want to do this?

If you sold the house today, you’d have about $187,000 worth of gain to report, less any commissions and fees associated with selling the house. With federal capital-gains taxes capped at 15 percent, this would cost you about $28,000 in taxes.

You need to ask yourself if moving to a less-expensive house is worth it to you. If your goal is to build as much net worth as possible before you die, it’s a smart move. But if your goal is to enjoy a nice lifestyle with the assets you have, it may or may not be worth it. Only you can decide.

Keep in mind that there is no guarantee that you’ll be able to sell your home for $250,000 two years from now. It’s quite possible that home prices will be lower, which could negate some or all of the tax savings.

Q: I would like to assist my son, age 26, with his financial future by fully funding a Roth IRA for him each year for at least a decade. He’s eligible, and will undoubtedly continue to remain eligible, for a Roth IRA. However, he’s a spendthrift, and I am concerned that he would withdraw some of the amounts I deposit rather than let it accumulate for retirement. Are there any alternatives to a Roth IRA that share its tax advantages and also protect against early withdrawals?

A: The Roth IRA would be a fantastic way for you to help your son build a retirement account. You can deposit the money without incurring gift taxes and the account will be tax-free when he reaches age 59. There is no other investment that provides for both tax-deferred growth and tax-free withdrawals.

Putting limits on his ability to touch the money creates a bit of a problem. There is no way you can restrict his spending once you give him the money, regardless of how the money is invested. The only way to limit his access is to either keep the money in your own name or put it into a trust, neither of which will accomplish your goal of using the Roth IRA.

Frankly, I think it’s a good idea to use the Roth. Simply tell your son that if he touches the money, he won’t get another dime and he’ll be cut off from his inheritance.

• Write to Scott Hanson at [email protected]moneymatters.com.


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