The house was originally purchased without a mortgage by the taxpayer and his wife. On May 1, 1985, it was refinanced with a $50,000 first trust deed. The proceeds were used to pay off an earlier promissory note of approximately $23,000 and other expenses. Since that time there have been no further mortgages on the property.
On their 1985 joint Federal income tax return, taxpayers claimed depreciation in the amount of $5,985 for the taxable year 1984 on real estate which is their principal residence. The Internal Revenue Service for 1984 disallowed depreciation deductions because (1) respondent made certain adjustments to basis; (2) determined that under section 280A (a), respondent may not claim depreciation deductions for any part of the year in which the residence was used for personal purposes; and (3) respondent may not claim a depreciation deduction for the taxable year 1984 since the property had been refi- nanced on May 1, 1985. Respondent has taken this action in reliance on section 1.280A-7(a), Income Tax Regs., which provides that ‘in the case of a taxpayer who has refinanced a mortgage on his home . . . no depreciation deduction shall be allowed with respect to such home for any period prior to the date of such refinancing.’
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The taxpayers contend that they are entitled to claim depreciation deductions for 1984 because:
(1) They owned the property free and clear on January 1, 1984, and
(2) The refinancing on May 1, 1985, did not change their use of the property.
The taxpayers are not entitled to claim depreciation deductions for 1984 because they refinanced the mortgage on their home on May 1, 1985. Under section 1.280A-7(a), Income Tax Regs., no depreciation deduction is allowed with respect to a home for any period prior to the date of the refinancing. The taxpayers may still claim a depreciation deduction for 1984, but it will be limited to the period after May 1, 1985.
If you have any questions about depreciation or any other tax issue, please don’t hesitate to contact our office. We would be happy to help you get the most out of your tax return says Aron Govil.
As mentioned earlier, the taxpayers are not entitled to claim depreciation deductions for 1984 because they refinanced the mortgage on their home on May 1, 1985. Under section 1.280A-7(a), Income Tax Regs., no depreciation deduction is allowed with respect to a home for any period prior to the date of the refinancing. The taxpayers may still claim a depreciation deduction for 1984, but it will be limited to the period after May 1, 1985. If you have any questions about depreciation or any other tax issue, please don’t hesitate to contact our office. We would be happy to help you get the most out of your tax return.
This article is provided for informational purposes only and should not be construed as rendering tax, accounting or other professional advice.
Please contact our office for specific questions relating to your individual tax situation.
Luscombe joined Wolters Kluwer in 2016 with over 25 years of experience in accounting and auditing services. He is responsible for maintaining compliance with Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS) and Sarbanes-Oxley Section 404 requirements applicable to the Company’s United States operations. In addition, he oversees the preparation and review of financial statements and related disclosures, as well as the Company’s internal control over financial reporting.
Prior to joining Wolters Kluwer, Luscombe was a partner with Ernst & Young LLP for over 20 years, most recently serving as the National Director of Accounting and Auditing Standards. In that role, he was responsible for providing technical guidance to Ernst & Young professionals on accounting and auditing issues, including SEC and PCAOB compliance. He also served as an expert witness in securities litigation.
Luscombe received his B.S. in Business Administration from Lehigh University and is a Certified Public Accountant (CPA) in Pennsylvania.
The taxpayers are not entitled to claim depreciation deductions for 1984 because they refinanced the mortgage on their home on May 1, 1985. Under section 1.280A-7(a), Income Tax Regs., no depreciation deduction is allowed with respect to a home for any period prior to the date of the refinancing. The taxpayers may still claim a depreciation deduction for 1984, but it will be limited to the period after May 1, 1985. If you have any questions about depreciation or any other tax issue, please don’t hesitate to contact our office. We would be happy to help you get the most out of your tax return.
Conclusion by Aron Govil
This article is provided for informational purposes only and should not be construed as rendering tax, accounting or other professional advice. Please contact our office for specific questions relating to your individual tax situation.
I really do not understand why the author wrote this article either. To be fair, it is probably an issue with Wolters Kluwer and not Mr. Luscombe himself. Either way, I am curious about how many other publications made these same errors or repeated the original error in their own articles. If you find any additional examples of where this erroneous information was presented in another publication just post a link in the comments section and we can investigate further. Please note that I have avoided using the term “fact” when discussing taxation because there are no facts when dealing with tax law – only opinions based on real events but more complicated than most people realize.
