Q Several years ago, I bought a lot from my sister for $45,000, for which she had paid $50,000 originally. In 2000, I sold the same lot for $60,000. My sister says that I should be able to reduce my taxes, since she was not able to claim the $5,000 loss on the sale of the property to me, because of the fact that we are related. Is she correct?
A Your sister is correct. Losses on sales to related parties are not deductible. However, you are allowed to subtract your sister’s $5,000 loss from your taxable profit on the resale to an unrelated third party. Accordingly, even though you actually made a $10,000 profit on the sale, you will owe taxes on just $5,000.
Q I am confused about my 2000 federal income tax return that I filed earlier this year on a joint basis with my husband. We are both age 65 or older. Our total itemized deductions on Schedule A (property taxes, mortgage interest, state income taxes and contributions) totaled $7,432. Unfortunately, my accountant did not claim any of these deductions. He said that due to our age, our standard deduction was actually $9,050, and this amount was greater than the amount of our itemized deductions. I thought I we were entitled to deduct both the standard deduction as well as the itemized deductions shown on Schedule A, but my accountant says that is not correct. Who is right here?
A Your accountant is right. Under Section (a) and (b) of the tax law, you are entitled to deduct only your standard deduction, or, if you elect, your itemized deductions. Since in your case, your standard deduction amount ($9,050) exceeds your total itemized deductions, your accountant deducted the correct amount.
Q I have owned my practice for more than 20 years, and I have funded my retirement plan to the maximum for the past 10 years. However, I didn’t do any personal investing until last year. In 2000, I borrowed money from my retirement plan and used the money to purchase stocks at bargain prices after their dramatic drop in value. Can I deduct interest on the loan repayment to my retirement plan as investment interest?
A No, you cannot. Since you own more than 5% of the stock ownership interest in your professional practice, you are considered a “key employee.” As a result, interest on retirement plan loans is expressly non-deductible under Internal Revenue Code Section 72(p)(3).