Question

Mary and Bob have been married for 25 years. They are both college professors. Mary (50 years of age) makes $65,000 annually and Bob (60 years of age) makes $75,000 annually. Their oldest daughter is getting married. Bob and Mary would like to either 1) take out a second mortgage on their home (they can get an interest rate of 7 percent) or 2) withdraw funds from their IRAs or 3) sell their rental property. The cost of the wedding is $35,000.   The equity in their home is $150,000; they have $80,000 in IRAs between the two of them and the basis of the rental property is $20,000. The rental property can be sold for $120,000. Mary and Bob want to know how they should finance the wedding and if tax implications will be a factor.

Please list the relevant tax authorities for this question.

Answer 1

In an option of mortgage they will be able to take deduction of interest under Schedule A, Itemized deduction but it will create a burden of payment.

Case Law: Sophy v. Commissioner, 138 T.C. 8 (2012) and Bronstein v. Commissioner, 138 T.C. 21 (2012)

On selling the property capital gain tax would be paid

Case Law: Salvatore v. Commissioner

Withdrawal of funds from IRA is taxable, but withdrawing from ROTH IRA is not taxable. Taxability will be in the year the amount is withdrawn, thus if Mary and Bob withdraw $35000, then they will have to pay taxes on whole $35000 as per the rate prescribed in federal tax.

On the basis of the facts it is advisable to take mortgage as in this way they would be able to deduct interest as well as expenditure which will be incurred on the weeding of their daughter and it will lead to tax savings.