Mary and Bob have been married for 25 years. They are both college professors. M

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.

Explanation / Answer

Solution.

In the given case all the options available to Bob and Mary have been analysed as under:

1) Taking out second mortgage on home: Tax law allows a person to deduct mortgage interest on up to $100,000 of home equity debt. Both limits are halved for married taxpayers who file separately. Thus if this option is chosen then Bob and Mary can get tax benefit for the amount of interest (@ 7%) from the equity in their home.

2) Withdraw funds from their IRAs: In this case, all withdrawals from IRAs are 100% taxable, and if taken before age 59½, they will be hit with a 10% penalty tax unless an exception applies. Since Mary is just 50 years old, this would not be a good decision.

3) Sell their rental property: When a property is sold then income tax is applied on capital gains that arise. Capital gain would be the difference between Sale value ($120000) and Basis ($20000 subject to depreciation if any). Thus it arises additional tax liability.

Thus with regard to above discussion it is amply clear that tax implication is a factor to decide and the best option for Mary and Bob is to take out second mortgage on home to arrange the funds.

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