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    Tax Issues for Jane Smith - Mortgages and Income

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    Jane Smith
    I think that the fees would be better used for paying off our house and buying a new, bigger house that I've had my eye on. Does it make better tax sense for us to pay off the mortgage, sell the house, and buy a new house, or should we just use the money to buy the new house after selling the old house?

    Also, I sell handcrafted jewelry which earned me $20,000 last year. Do my business activities constitute a trade or business for federal income tax purposes? Or, is this just a hobby? Should I establish a separate trade or business to get tax benefits on these earnings? Does it make any difference that I use my car primarily for transporting my jewelry to different shops around town? Finally, I think I can earn more money if John were willing to invest $15,000 for new jewelry making equipment since my original equipment, which cost $10,000 five years ago, is almost obsolete. Does this make sense from a tax perspective?

    Jane Smith tax issues:
    a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?
    b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
    c. Does Jane have a business or hobby? Why is this distinction important?
    d. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry making activities?
    e. What tax benefits would John realize if he invested $15,000 in Jane's jewelry making?
    f. Can Jane depreciate her vehicle or jewelry making equipment? How?

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    https://brainmass.com/business/accounting/tax-issues-jane-smith-mortgages-income-403565

    Solution Preview

    a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?

    The differences only relate to the amount of deductible mortgage interest paid during a year. Since both are deductible and both are the same type of debt, there is only a calculation of the amount of interest times the tax rate of the taxpayers. There is one exception: mortgage interest is limited to $1,000,000 of deduction.

    b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?

    No, Section 1031 exchanges are only used for business assets, not personal residences. The money for a new house is not a taxable event in itself, but it will have been taxed at the ...

    Solution Summary

    In 549 words, each question is answered with a few sentences including explanations for application of the Internal Revenue Code.

    $2.19

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