Mason Gregg’s car was destroyed by a flood. Unfortunately, his insurance had lap
ID: 2485457 • Letter: M
Question
Mason Gregg’s car was destroyed by a flood. Unfortunately, his insurance had lapsed two days before he incurred his loss. Mason uses his car for both business and personal use. Mason, who is self-employed, does not have adequate savings to replace the car and must borrow money to purchase a new car. He is considering taking out a home equity loan, at a 5% interest rate, to obtain funds for the purchase. Margaret, his wife, would prefer not to do so because they paid off their mortgage recently and she does not want to incur any obligations related to their home. She would prefer to sell some of their stock in Bluebird, Inc., to raise funds to purchase the new car. Mason does not want to sell the stock because it has declined in value since they purchased it and he is convinced that its price will increase in the next two years. Mason has suggested that they obtain conventional financing for the purchase from their bank, which charges 7% interest on car loans. Identify the tax issues related to each of the three alternatives Mason and Margaret are considering.
Explanation / Answer
There are many nontax issues (financial, investment, and personal) involved in the Greggs' decision, but this discussion will be limited to the tax issues. Interest on the home equity loan will be fully deductible, partly as home equity interest and partly as business expense (related to business use of the car). Interest on the conventional loan will be deductible only to the extent the car is used for business purposes.
The tax issue related to a possible sale of Bluebird stock concerns deductibility of the loss
that will be incurred on the sale. If the Greggs have capital gains in excess of the loss, the
entire loss can be offset against the gains. If they have no capital gains, they will be limited to a capital loss deduction of $3,000 in the year of sale, with excess capital losses being carried forward. It will also be necessary to determine whether the loss is long term or short term. There will also be tax issues related to depreciation on the car, but those issues are independent of the source of funding for the purchase