On Mon, 7 Mar 2005 mune19642003[at]yahoo.com wrote:

- quote -

Transfers incident to divorce are not taxable (and are ignored). It's your
problem that you didn't have your divorce lawyer bring in a tax advisor so you
wouldn't get screwed in the deal. Sorry.

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"Rick Merrill" <rick0.merrill[at]gmailNOSPAM.com> wrote:
- quote -

There are a few WRONG answers being posted on this subject
so I thought I would expand on my original answer and give
the OP some authority.

Under Code Section 1041, any transfer of property between
spouses during marriage or any transfer of property between
former spouses incident to a divorce is treated as a gift.
Because these transfers are treated as gifts, the transferee
spouse may exclude the property received from his gross
income under Code Section 102(a).

The transferee spouse's basis in the property received for
all purposes is the transferor's adjusted basis immediately
before the transfer. Code Section 1041(b)(2). This carryover
basis rule applies whether the adjusted basis of the
transferred property is less than, equal to, or greater than
its fair market value at the time of the transfer,
regardless of the value of any consideration provided by the
transferee, and applies for purposes of determining loss as
well as gain on the subsequent disposition of the property
by the transferee. Reg. Section 1.1041-1T(d),

Code Section 1041 is not elective. It applies whether the
transfer is for relinquishment of marital rights, for cash
or other property, for the assumption of liabilities in
excess of basis, or for other consideration, and is intended
to apply to any indebtedness that is discharged. Reg.
Section 1.1041-1T(d). Even if the transfer is a bona fide
sale, the transferor does not recognize gain or loss, and
the transferee does not acquire a new cost basis in the
transferred property. Reg. Section 1.1041-1T(a) Code Section
1041 applies regardless of whether the transfer is of
property separately owned by the transferor or is a division
(equal or unequal) of community property. Further, Code
Section 1041 applies even if the transferred property is
subject to liabilities that exceed the adjusted basis of the
property. Reg. Section 1.1041-1T(d),

EXAMPLE: Andy owns property having a fair market value of
$10,000 and an adjusted basis of $1,000. In contemplation of
making a transfer incident to a divorce from Becky, Andy
borrows $5,000 from a bank, using the property as security
for the borrowing. Andy then transfers the property to Becky
and Becky assumes, or takes the property subject to, the
liability to pay the $5,000 debt. Under Code Section 1041,
Andy recognizes no gain or loss on the transfer of the
property, and Becky's adjusted basis in the property is
$1,000.

Code Section 1041 also applies to transfers of property
incident to a divorce. Code Section 1041(a)(2). A transfer
of property is incident to a divorce if it occurs within one
year after the date on which the marriage ceases or is
related to the cessation of the marriage. A transfer is
treated as related to the cessation of the marriage if the
transfer is pursuant to a or separation instrument and the
transfer occurs not more than six years after the date on
which the marriage ceases. A divorce or separation
instrument includes a modification or amendment to a decree
or instrument. Reg. Section 1.1041-1T(b)

Gene E. Utterback, EA, RFC

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Given the facts that we have, i think Gene has the right
answer. Transfers incident to a divorce are treated for tax
purposes as gifts to the buyer from the seller, and result
in no gain recognition to the seller. See Code section
1041.

Your cost basis is the original basis of the home (your
original one-half plus the half that your ex is deemed to
have gifted to you under the tax law), so a total of $220.
If you sell the house for $540, you will have a gain of $310
and will owe tax on the gain.

--Chris Ballard

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Bill wrote:

- quote -

Except that he didn't pay her for her share of the house; he
paid her "property settlement." And there's no gain or loss
or basis adjustment in a property settlement incident to
divorce.

I'm with Gene - your attorney (or your tax advisor, if that
person was asked to comment on the tax ramifications of the
divorce terms) should have told you what the tax
consequences of the split were.

Phoebe

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"Gene E. Utterback, EA" <eagent[at]alliancetax.com> wrote:
- quote -

In this kind of situation timing is everything. You might be
able to restructure the divorce decree to exclude the house
from the property settlement. If you then wait at least a
year, you can then buy the ex's half from her and be able to
include the additional cost as basis; she might still be
able to exclude her gain if she meets the "2 out of 5"
test.

I just had a related circumstance with a client who needed
to sell her half of a rental property to her ex. In that
situation, they were still within the time period in which
transfers are presumed to be "incident to divorce." With
full knowledge of the tax ramifications (ex would be
responsible for full gain when he sells the rental; my
client has no tax obligation) versus waiting until they were
outside the year time period (my client has gain on sale and
ex gets new basis), they were able to agree on a middle
ground where the sales price was lowered to split the tax
difference.

--
Tom Healy, CPA
Boulder, CO
Web: http://www.tomhealycpa.com

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mune19642003[at]yahoo.com wrote:

- quote -

You paid for half the original house and bought out the
other half for 200K so your cost basis is 220K/2 + 200K or
310K ... i.e. your cap gain would be 540-310=230, ta da
under the limit.

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<mune19642003[at]yahoo.com> wrote:

- quote -

You should have sold the house before you got divorced.
Sorry, but that is the scoop. You do NOT get to adjust your
basis for money you paid to your wife (or ex-wife) to get
the house.

Were you properly advised by your attorney of tax
ramifications of this situation BEFORE your divorce was
final? You should have been so advised. Perhaps you have a
malpractice case against the attorney, assuming s/he did NOT
properly notify you of this.

Gene E. Utterback, EA

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mune19642003[at]yahoo.com wrote:

- quote -

Who told you that? Sounds wrong to me: Your cost basis
should be adjusted to reflect the additional $200,000 --
which you paid to your wife, for her share of the house.

And you should certainly also include the original $110,000
(your share of the $220,000), which means your correct cost
basis is now about $310,000. So if you sell for $540,000,
your gain would be $230,000 -- and therefore free of any tax
obligation, under current law.

Of course, there may be other additions to the cost basis
which you haven't included -- such as significant home
improvements, like a room addition or remodeling of the
kitchen. Those would also be added into _your_ basis. I've
only dealt with the figures you provided.

Bill

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I and my ex jointly bought the house in 1998 for $220,000 in
California. We lived in the house since then. We started
divorce proceedings in 2004 and my wife moved out. Current
value of the house is 540,000.

I had to pay her, by refinancing my mortgage, half the
current property value minus loan remaining which came to
about 200,000. i.e [ (540k - 140k)/2 ] . She did not pay any
taxes for that.

Now I understand if I sell the house I am stuck with a
capital gains tax as a single person on the entire gain !!!
i.e 540k-220k = 320 K as the limit is only 250K ?

This does not look fair, as my cost basis should be
readjusted when I paid my ex half the value 200K !!!
My real gain is much less.

Any comments ??

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