Ask the tax adviser
By George Saenz • Bankrate.com

April 21, 2000 -- The tax adviser explains using IRA money to buy a home, and various property depreciation methods.

Using IRA money to buy a home

Dear Tax Talk:
I am using an IRA ($10,000) to put down on a new home as a first-time buyer. May I use that money for the closing costs or home repair, as well as the mortgage, without getting penalized for early withdrawal?
Thanks for your help.
Dina

Dear Dina:
Using the IRA distribution to purchase a new home is an excellent tax planning tool for first-time homebuyers trying to save up enough money to purchase a house. Some people will tell you it is a bad idea since you have to pay income tax on the money that is withdrawn. But that additional income will be offset with the deduction of home mortgage interest and taxes if you buy the home early in the tax year. And you will own a home that you may not otherwise have been able to afford without using the IRA money.

What makes it an excellent planning tool? If you are not a participant in a pension plan or your income is below a certain threshold, you get to deduct the contributions to the IRA. What does it mean to be able to deduct the contribution? Lets say you are saving up for a home by putting away $2,000 a year. If you put the money in a deductible IRA, and you are in a 28 percent tax bracket, you'll get an extra refund of $560 as well.

When you withdraw the money to buy your first home, you do not incur the 10% penalty for early withdrawal (i.e. before age 59 ½). You can use the money withdrawn for acquisition costs defined as:

1) The costs of buying, building or rebuilding a home, and
2) Any usual or reasonable settlement, financing or other closing costs.

Save the extra tax refunds for the furniture since that does not qualify as acquisition costs.

Various property depreciation methods

Dear Tax Talk:
I am trying to depreciate my husband's tools and toolbox used on his job as a mechanic. What is a MACRS asset, and what are ADS assets? Do I use the MACRS to compute the depreciation, and can you please give me the full definition of both MACRS and ADS?
Gratefully yours,
Leslie

Dear Leslie:
Let me see if I can give you just enough information so that your head does not spin from too much Tax Talk.

MACRS (rhymes with acres) is the modified accelerated cost recovery system (a form of depreciation) applied to assets purchased after 1986. ADS is the alternative depreciation system required for certain assets employed in specific uses, such as those used outside the country, or if the taxpayer elects to use this system. This method has limited use and is best left in the hands of a CPA.

MACRS assets are depreciated over what the IRS establishes as the asset's recovery period, generally five or seven years. Recovery period (which is based on the useful life of an asset) is found in tables updated regularly by the IRS and reproduced in Publication 946. If you look at these tables, you'll realize that they were written for General Motors and AT&T and not the average taxpayer. The average taxpayer does not have to depreciate a satellite (used outside the United States for that matter).

Which brings me to my advice on how to depreciate the mechanic's tools. Every business, including the business of being an employee, needs to establish a capitalization policy for assets it acquires. A capitalization policy refers to when an asset will be capitalized and depreciated rather than expensed. In my opinion, in many lines of business, including mechanics, any one tool costing less than $100 should be expensed as small tools or supplies. Anything costing more than that can be capitalized and depreciated.

Now, try to figure out from the Publication 946 tables what life you should use for small tools. If you search you'll see a lot of categories exclude small tools, but no category includes it. When an asset does not fall within a category, the recovery period is seven years. But then look at Asset Class 57.0 Distributive Trades and Services. Lots of research tells me that this applies to mechanic's tools. Use the MACRS tables for five-year recovery period to recover the cost of any capitalized tools.

Tax tip: You may also want to consider the section 179 election. But, that's another question.

-- Posted: June 22, 2002

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