How to Break Free of Troublesome Duo of Worthless Stock and Stubborn Broker

Q I am caught in one of those horrible Catch-22 situations with my stockbroker. I purchased stock five years ago in a company that is no longer listed on any exchange and whose shares no longer trade. Yet every time I try to get my broker, who holds the shares in street name for me, to declare the stock worthless so I can write off my losses, he refuses, saying that the company is still viable even though its stock can’t be traded. So I asked for the stock certificate myself so I could sell it to a friend for $1 and take the loss. The broker says no certificate can be issued because the company no longer has a transfer agent. Shouldn’t common sense prevail at some point?

--R.E.S.

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A Absolutely. Even the IRS isn’t likely to impose your broker’s strict standards. Our expert says you may simply declare your shares worthless, regardless of whether you have the certificate. In fact, you don’t even have to technically sell your shares to declare your loss. Our expert says that any time it would cost you more (in brokerage commissions) to sell than you would realize from a sale, you can write off your investment.

However, be prepared to document your case with particulars on the stock’s trading prices and activity as well as the company’s sad history should the IRS decide to question the deduction. A careful, accurate and honest documentation of the facts should suffice even rigorous IRS scrutiny.

One Relative’s Loss Is Another’s Gift

Q A piece of property owned by our family and assessed at $95,000 was sold to one family member for $60,000. Can the rest of the family take a deductible loss on the difference?

--S.I.

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A You can’t claim a loss when selling property at a bargain price to a family member. If you sell it for less than its market value, the difference is deemed a gift, not a loss.

Disaster Relief Funds Don’t Affect Tax Basis

Q My home was completely destroyed by the Northridge earthquake. Its cost basis was $60,000 and I received $175,000 from insurance proceeds and federal disaster relief funds to rebuild. The cost of the rebuilding was $195,000. If I sell the home now for $200,000, what is my potential taxable gain?

--J.T.

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A Insurance and disaster relief funds are not taxable income, so you can’t count them toward your tax basis. Your new basis is $80,000, consisting of the original $60,900 plus the additional $20,000 you invested in the rebuilding over and above the insurance and relief funds. If you sell for $200,000, your potential taxable gain is $120,000, which you could erase by invoking your $125,000 exclusion, assuming you are at least 55 years old and have lived in the home three of the last five years as your principal residence.

Does Bankruptcy Clear Taxes on Home Sale?

Q A year ago my husband and I were forced to give back our home to our lender and file for bankruptcy. We had purchased the home for $235,000, and when we gave it back, it was valued at $289,000. My problem is that we are financially unable to purchase another home within 24 months that meets or exceeds the home’s $289,000 value. Will we face a tax bill on the gain? May I use my $125,000 exclusion to wipe it out? I am over age 55.

--M.D.

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A You’ve omitted two key pieces of information: how much you owed the bank when you gave back your home and what your tax basis in the home was. We can’t speculate about the latter matter, but we must assume that your debt was more than $289,000 and that the loan had gotten that high because you had refinanced the house and pulled out cash. Why do we assume this? Because the rest of this story wouldn’t make sense otherwise. If you didn’t owe more than the house was worth, then you would have sold the house for $289,000, paid off the original $235,000 or less loan and applied the profit toward your other debts.

That said, what’s your situation? Because you owed the bank more than the home was worth, you were relieved of debt when you gave the house back to the lender. And this debt forgiveness is treated as taxable income. The only way to escape the tax bite is to declare insolvency.

Do you have to purchase a home worth at least $289,000? Our experts say you do. Under the presumed facts of your case, the $289,000 fair market value of the home at the time of its repossession is deemed to be its sales price. You must either replace your personal residence with a home of that value or face taxation on the difference between your tax basis and that amount. However, you may at this point apply your $125,000 exclusion, and so long as your tax basis is $164,000 or more, your taxable gain will be wiped out.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to [email protected]