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John Smith

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It was a pleasure to meet with you last week. This memo is in regard to your concerns that you mentioned during our meeting and my recommendation for each one. Please review this memo and call me if you have any questions. 1) John Smith tax issues: a. How is the $300,000 treated for Purposes of Federal Tax income? Gross income means” all income from whatever source derived, including (but not limited to the following items: Compensation for services, including fees, commissions, fringe benefits, and similar items…..” (http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._61._Gross_income_define d#Location_in_Internal_Revenue_Code) According to IRC Publication 3402 Taxation of Limited Liability Companies “an individual owner of a …show more content…

You will be able to deduct your new home mortgage interest and property tax but there is no tax benefit if you pay off your existing mortgage.

b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case? According to Internal Revenue Code section 1031, a personal property does not qualify for and cannot be exchanged under Sec. 1031. With exchanging of your personal home, you are not qualifying for “like-kind” exchange treatment under the IRC Sec. 1031 tax-free exchange. There are no tax benefits for exchanging their existing home with a larger home. There may be a greater tax deductions for their mortgage interest or/ and Property tax.

c. Does Jane have a business or hobby? Why is this distinction important? According to Code Sec.162 trade and business expenses is for only the expenses that paid or incurred in for business or trade activities. The purpose of this code is to deny deductions for any personal expenses. (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_162) According to IRC Sec. 183(c) “hobby loss rule

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