Withdrawals from inherited IRAs

Recently, I inherited a traditional IRA from my father’s estate that did not name a beneficiary.

Recently, I inherited a traditional IRA from my father’s estate that did not name a beneficiary. Can I make minimum withdrawals from this IRA over my life expectancy or must I take these funds out immediately?

This depends. If your father was required to take minimum distributions, you must take them based on his life expectancy at the time of his death. If he died prior to his “required beginning date” (April 1 of the year following the year he turned 70 1⁄2), you must close out the account within five years. In the event your father would have named you as a beneficiary of the IRA, the result would have been much better. In that case, you could have spread the IRA withdrawals over your own life expectancy to maximize the tax deferral.

Currently, I owe $150,000 on my home mortgage, and another $50,000 of credit card and automobile debt on which I cannot deduct the interest. I am planning to refinance the mortgage for $200,000 and use the excess funds to pay off these debts. Will I be able to deduct all of the interest on my new home mortgage?

Probably so. Since you do not plan to use the additional $50,000 borrowed to improve your home, this is considered “home equity debt” rather than “home acquisition debt.” In general, interest on the home equity debt is fully deductible as long as the total debt does not exceed $100,000, even if you are using the borrowed money for debt reduction or personal purposes.

However, the interest on the $50,000 home equity portion of the new mortgage is not deductible for purposes of the alternative minimum tax. Accordingly, if you are subject to the alternative minimum tax this year, a portion of this interest may not be deductible.

One of my staff members opened a health savings account (HSA) at a local financial institution. I made a contribution to her HSA in 2004. Will she owe federal or state income taxes on it?

No. Contributions by an employer on behalf of an employee to an HSA account are not considered as taxable income to her, nor are your contributions subject to withholding or employment taxes (FICA and FUTA).

Your staff member is free to deduct contributions which she makes to her HSA account, but they are subject to the limitations on total contributions (including yours). The limit is based on her family health policy deductible, but cannot exceed $5,150 for 2004 or $5,650 if she is at least 55.

Doctors should keep in mind that the nondiscrimination rules require you to make comparable contributions for all eligible employees with HSA coverage during the same time. Contributions are considered comparable if they are either the same amount or the same percentage of the policy deductible.

I presently own my professional office building. It has a fair market value of approximately $400,000 and no debt. I am entering into negotiations to sell my practice, and the buyer also is interested in purchasing my office building.

I am thinking about retiring to Florida and purchasing a townhouse there. Recently, I read that it may be possible for me to do a tax-free exchange with the buyer of my practice, whereby I would transfer the office building to him in exchange for the transfer of the Florida townhouse to me. I also heard that if I hold the townhouse as rental property for some time - and later convert it to my personal residence - I could then sell it and avoid paying any tax on the gain from the sale, including the office-building profit which was rolled over into the townhouse purchase. Is this correct?

Yes, provided the transaction is properly structured, you should be able to exclude up to $500,000 of gain from the sale of the personal residence. To accomplish this, the transfer of the office building in exchange for the Florida townhouse must be structured as a tax-free exchange under Section 1031. Under these rules, you must be exchanging “like kind” property used for business or investment in exchange for other property with a similar use. This means you would need to rent the Florida townhouse to a third party for some time to establish this as rental/investment property qualifying for tax-free exchange treatment.

Following this, you would need to convert the Florida townhouse into your personal residence. Once you have used this property as your personal residence for at least five years (two years under prior law), you can exclude up to $500,000 of gain (if married) from taxes on the sale. The gain excluded would include any gain from your office building rolled over into the new townhouse.

John K. McGill is a tax attorney, CPA, and MBA, and is the editor of The McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from John K. McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Call (704) 424-9780 or visit the Web site at www.bmhgroup.com.

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