The tax implications of having two homes

Q My fianc and I each own a small house, one is in Washington, D.C., one is in Maryland, and we are trying to figure out how best to address tax issues when we marry. We spend every weekend at his Maryland place, and workdays in D.C. Will we be able to keep our mortgage-interest deductions for both houses? For income-tax purposes, do we have to file as residents of Washington?

- D.D., Washington

A Yes, you get to keep the mortgage deductions on both houses, says Gary Schatsky, a fee-only financial planner and attorney in New York.

Your "primary residence" for tax purposes is usually determined by where you spend more than half your time. That "sounds like Washington," says Mr. Schatsky. But also take into account where you are registered to vote and where you get most of your mail, he says.

Still, the "most-important issue may be one you don't even raise," says Schatsky. If you sell one of the houses, you could lose your tax exclusion on capital gains if you have not lived in that house as your primary residence for at least two out of the last five years before it is sold.

So if you are considering selling one of the houses anytime within the next few years, it may save you big bucks to talk to a local attorney to make certain you have chosen the right house as your primary residence, Schatsky says.

Q Can you name a few ways to invest IRAs in real-estate ventures? Second, is it legally possible to cash in an IRA before it is due?

S.L., Boston

A You can invest in Real Estate Investment Trusts - corporations that deal with income-producing properties - or REIT mutual funds, says David Bendix, president of Bendix Financial Group, in Uniondale, N.Y. But you cannot put an actual property, such as a home or office building, in the IRA.

And yes, you can withdraw from an IRA before reaching the permissible withdrawal age of 59-1/2. But if you do, you will have to pay taxes on the earnings and contributions (assuming the contributions were tax-deductible).

You will also usually be stuck with a 10 percent tax penalty, unless the money is used for a medical reason or some other government-sanctioned exception. If the IRA is invested in bank CDs, you would also face early withdrawal penalties, Mr. Bendix says.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com

(c) Copyright 2000. The Christian Science Publishing Society