ASK THE EXPERT: ANSWERS TO YOUR QUESTIONS Home ownership transfer; donating depreciated property; beating Medicare tax Your questions this month are answered by Daniel Eule of New York City, senior tax manager at the accounting firm Deloitte Haskins & Sells.
By Daniel Eule Editor: Robert Wool

(MONEY Magazine) – Q. My elderly mother is considering giving me her house. It has a value of approximately $95,000 and comes with an equity loan of about $35,000. I would assume that loan and then rent the house to my mother at a rate that would equal the loan payments. She wants this plan because she thinks it will allow us to keep the house out of probate when she dies. Would this be advantageous to both of us? What about gift taxes? Archie B. Noell, Winston-Salem, N.C. A. There are better ways to accomplish what you both want. If she gives you the house now, you will assume her basis -- the house's cost plus improvements over the years -- which is probably quite low. Then when you sell the house, presumably after she dies, you will have to pay tax on a big capital gain calculated on that low basis. But if your mother left you the house, you could take advantage of a stepped-up basis, generally the house's fair market value at the time of her death. Today it would be $95,000. That means on any subsequent sale of the house, no gain would be recognized on up to $95,000 of proceeds. Assuming your mother's estate is worth less than $600,000 -- the amount covered by her unified credit -- no estate tax would be due either. Your mother can keep the house out of probate by putting it into a revocable living trust with terms that transfer the house from the trust to you on her death.

Q. I donated my library of medical books and journals appraised by a librarian at $13,000 to a medical school. My accountant tells me that this charitable donation is not tax deductible because I have already depreciated the books as a business expense over the years. Since I spent considerably more for the books, I'd like to know if he's right? If so, could I have given the books to a member of my family who could then have donated them to the medical school and received the deduction? Dr. Mohammad Amin, Louisville, Ky. A. Unfortunately your accountant is right. If the books are now worth $13,000, and you paid considerably more for them, you would have taken more than $13,000 in depreciation. When you make a charitable gift of previously depreciated personal property, the value of your contribution is reduced by the total amount of that depreciation. So in your circumstances, no write-off would be available. But if you had paid only $10,000 and then depreciated that amount over the years and the books were currently worth $13,000, then you would receive a $3,000 charitable deduction. Slipping the volumes to your relative is no solution. The same law would apply to the depreciated property even if your relative donated it.

Q. I am retired and will be eligible for Medicare in mid-1990. In order to ease the new Medicare income tax surcharge, should I liquidate and pay tax on my $23,000 IRA account in 1989 before my Medicare surcharge kicks in, or wait until I'm 70 1/2, when withdrawals will increase my income and raise the amount of my Medicare surcharge? Don Pickels, San Antonio A. Trying to reduce the Medicare surcharge, which currently runs as high as $800 for a single person, is a good idea. But liquidating your IRA now sounds great only until you do the numbers. Assuming you are now 64 and in the 28% tax bracket, you might save about $1,800 on the surtax with this maneuver. But you would lose the tax-deferred benefit on your IRA investments. Conservatively, that would cost you more than $3,000 in what you would otherwise realize on your investments.

Q. I've read that the cost of materials and labor you pay to a building contractor for a home improvement adds to a house's adjusted basis, thereby * reducing the capital-gains tax when you sell. I'd like to know about any tax breaks for related expenses. For example, is there a mileage allowance for a homeowner who uses her own passenger vehicle, in my case a pickup truck, to fetch materials like Sheetrock, windows, lumber, and the like? And what about the cost of telephone calls to contractors? Mary Ann Finamore, Colonia, N.J. A. No mileage allowance. But keep records of the telephone calls, the cost of gas for your truck and other similar expenses. They may be added to your basis. They may not be taken as tax deductions, however.