To: John and Jane Smith
From: XXXXXX, CPA Near Lakes City
Date: February 7, 2013
Dear Mr. & Mrs. Smith,
Thank you for coming to our offices and allowing us to review and discus your concerns regarding your tax questions. I have been assigned to reply to your questions and I have listed my recommendations below. After you both have reviewed these recommendations, please contact me so we can go over any additional questions you may have.
Mr. Smith’s questions:
1(a) How is the $300k treated for purposes of Federal tax income?
According to the IRC §61(a)(1), “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the…show more content… Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. Depreciation is treated as an expense and is a line item on your income statement but must be applied only to the building and not the land (since land does not wear out over time). You will be able to depreciate the building over a period of 39 years using the Modified Accelerated Cost Recovery System (MACRS). IRS Publication 946 contains the rules and guidelines governing depreciation of non-residential or commercial property.
Ms. Smith’s questions:
2(a) What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes?
Unfortunately, paying down your current mortgage and assuming a new mortgage will not result in different tax consequences for you or Mr. Smith. The only possibly benefit to you would have to be based on the amount of interest (based on the rate) you are paying on your current debt and the amount you would have to pay on the new debt or loan.
If you were to sale your current residence, you could be eligible to exclude up to $500k (married filing jointly) of that gain from your income. Of course, this gain would apply to the tax year in which the property was sold and I believe you are looking for tax benefits