Long-Distance Rental Plan Is Risky

QUESTION: I am 35 years old with a wife and two young children. I earn $77,000 annually and own a house and an investment condominium in Southern California. I have a career-enhancing opportunity that will require my relocating to the Midwest for about five years. I am wondering what I should do with my house. I’d like to rent it out while we are away.

Even though my monthly mortgage is about $500 more than I could get in rent, I want to keep the house because I feel it has much appreciation potential. I could still buy a house in the Midwest by either selling the condo, which is not appreciating much, or some stock, which also don’t show much appreciation potential. What do your advisers suggest?--E. S. K.

ANSWER: Our advisers expressed some skepticism about your plan. Do you really think you can adequately manage a rental property, particularly one that was your own house, from a distance of 2,000 miles? Can you really afford to subsidize your renters to the tune of $500 per month? If so, proceed. If not, you should rethink your plan before you do anything you might later regret.

Assuming that you do decide to convert your home into a rental, how will you finance the purchase of a house in the Midwest? Thomas Gau, a financial planner with Kavish & Gau in Torrance, thinks that you should probably sell the stock to raise the money for the down payment. He reasons that if the stock hasn’t appreciated much, then you probably won’t owe much tax on it and you can apply the proceeds toward the down payment.

On the other hand, if you sell the condo, you could face tax on the appreciated value, leaving you with less to put toward the down payment on the house. He also notes that the depreciation on the condo affords you a tax deduction you may not want to give up.

Strategy on Retirement Plan Payout Is Good

Q: Our company is dropping its retirement plan, and I will shortly be receiving a distribution of about $50,000. I want to use about $10,000 of the amount to pay off some personal debts and reinvest the remainder in some sort of a tax-sheltered retirement account.

However, my accountant told me that if I spend the $10,000 before I re-invest the remaining $40,000, I will be subject to income taxes on the entire $50,000. She said I must first invest the $50,000 and then pull out $10,000 the following year, at which time I will be subject to taxation on just the $10,000.

This all sounds pretty strange to me. Can you make any sense of it?--D. C.

A: What your accountant told you used to be true. But the law has changed, and essentially the strategy you originally intended to use is now permitted without dire tax consequences.

The law governing retirement plan distributions allows a taxpayer to take a partial personal disbursement and roll over the remaining funds into a tax-deferred retirement account. Of course, you will be taxed on whatever amount you withdraw for your personal use.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.