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Lisa is the sole proprietor of a business that manufactures solar panels. This week Lisa was...

Lisa is the sole proprietor of a business that manufactures solar panels. This week Lisa was approached to exchange her business assets for shares in Burns Power. As part of the exchange, Lisa is requiring Burns Power to assume the home equity loan on her home. Do you think Lisa should argue that there is no tax-avoidance motive in this arrangement? Suppose that Lisa established her business five years ago by investing funds from a home equity loan. Does this make any difference?

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Answer #1

Solution- The mortgage is a secured debt on a qualified loan in which individual have an ownership interest. A secured debt is the one in which individual signs the instrument that:Makes individual the owner in the qualified home security for the payment of debtStates that in case of default home will be used to satisfy the debtIs recorded under any local and state law which is applicable

The arrangement of assuming the loan as home equity loan on her home is with a motive of tax avoidance because tax will be calculated on the adjusted taxable income which is computed after deducting itemized deductions from it. Taxable income is the income upon which the tax is calculated. Itemized deduction or standard deduction is deducted from adjusted total income; the balance is denoted as taxable income upon which slab rates is applied and tax is calculated. If the loan is assumed as home equity loan on her home then the deduction of interest amount will be available to Lisa which will reduce the tax liability of Lisa.


2.Suppose that Lisa established her business five years ago by investing funds from a home equity loan. Any difference?

If Lisa established her business five years ago by investing funds from her home equity loan then the home interest loan will be deducted on Schedule C which will reduce the net profit and will result into significant saving in self-employment tax.

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