Are Post-Riot Insurance Settlements Taxable?

Q: My commercial building was completely burned during the riots in Los Angeles. I expect an insurance settlement of $500,000.

At the same time, I also plan to swap that vacant lot for another piece of commercial property worth $400,000 in a tax-deferred exchange under Sect. 1031 of the Internal Revenue Code.

How does the insurance settlement apply to the exchange?

Will the insurance settlement be taxable income to me? --J.W.B.

A: The insurance settlement and exchange are two separate transactions that happen to involve the same piece of property.

The law permits you two years from the end of the tax year in which you received the insurance settlement to replace the destroyed business property. You have three years if your investment or business property is condemned but not destroyed. If you do not replace the property within that time, the insurance settlement is considered taxable income.

You have apparently chosen, in essence, to divide your property into two separate holdings: your insured, and now demolished, building and the bare land.

Our experts say your plan to exchange your bare lot for another piece of commercial property makes a great deal of sense, especially if your lot has a low tax basis. The exchange allows you to defer taxes on any appreciation your lot has enjoyed over the years by acquiring another property of equal or greater value.

But while the exchange takes care of your potential tax obligation on the lot, it does not affect your insurance settlement.

To avoid taxation on those proceeds you must reinvest them within two years.

The clock on your two-year reinvestment period stops running two years from the end of the year in which you receive your insurance settlement.

Finding the Value of Old Stock Certificates

Q: I have stock certificates from two now-defunct oil companies in Los Angeles. The certificates, which are dated in 1900, are in excellent condition and should make an ideal addition to someone’s collection. How do I find out their value? --H.R.

A: Interest in old stock certificates has gradually been increasing among collectors who want them for both their historic and aesthetic value. Although Europeans have been the primary buyers up until now, some brokers say an active market is developing on this side of the Atlantic as well.

You should have no trouble finding out what your two certificates are worth. When seeking a quote, you should send a photocopy of the certificates along with your name, address and a stamped, self-addressed envelope for a reply. Never, ever send the actual certificates; you may never see them again.

Among the brokers dealing in antique stock certificates are R.M. Symthe & Co., 26 Broadway, New York, N.Y. 10004, and George LaBarre Galleries, P.O. Box 746, Hollis, N.H. 03051.

Deciding Who Gets the Tax Deduction

Q: Earlier this year, my daughter and her husband joined with me to purchase a home in which we all live. We hold title as joint tenants. I am the 55% owner of the home; they own 45%. We share all expenses based on the ownership ratio. However, because I provided the money for the entire down payment, I would like to take the entire tax deduction for the first year’s interest and property taxes. After that, we would split the deduction 55%-45%. Is this possible? --J.L.

A: The operable question here is: Whose names are on the mortgage?

If all three of your names are on the mortgage, then the mortgage interest and property tax deduction must be split according to who paid what share of those expenses. If the bills were split 55%-45%, then that is how the deduction must be split. You cannot decide to take the entire deduction just because you provided the money for the down payment or because you need the deduction more for your income taxes. However, if you did make all the mortgage and property tax payments, you would be entitled to the entire tax deduction.

If the names of your daughter and son-in-law are not on the mortgage, then you must take the entire mortgage interest and property tax deduction--this year and every year thereafter. Is this true even if your daughter and son-in-law are actually making their share of those payments? Yes, say our experts. The issue centers on whose responsibility those payments are. If only your name is on the mortgage document, then those payments are considered your sole responsibility. Even if your daughter and son-in-law are making their share of the payments, their contribution is considered a gift to you--not a tax-deductible payment.

Only Children, Parents Qualify for Transfers

Q: You have frequently mentioned how parents and children can transfer real estate between themselves in California without triggering a reassessment for property tax purposes. Does this same principal hold with transfers from grandparents to their adult grandchildren? --S.B.

A: No. The law allowing reassessment-free transfers of a principal residence and another $1 million worth (based on assessed, not market, value) of real estate between generations is limited strictly to parents and their children. These transfers can go from parent to child or from child to parent; it doesn’t matter. However, the transfers cannot include a grandchild. This, of course, sets up the next question: Could you give the property to your own child and stipulate that it be given to your grandchild? That answer is also no, because it would smack of a “step transaction,” which is a series of moves designed to circumvent tax laws.

However, if you did not make that stipulation in writing or in any other traceable form and your child later transferred your property to his child a few years after getting it from you, our experts say it would be difficult for authorities to prove a pre-plotted step transaction had taken place. Having said this, we should make it perfectly clear that we are not suggesting any particular course of action. The law prohibits arrangements to circumvent its intent.