Tax Efficient Gifting of Home Equity in Divorce

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Subject Author Date Tax Efficient Gifting of Home Equity in Divorce W 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Brew1 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Mark Bole 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Arthur Kamlet 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... W 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Mark Bole 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... W 08-31-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... removeps-groups@yahoo.com 09-01-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Gene E. Utterback, EA, RF... 09-10-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... removeps-groups@yahoo.com 09-14-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... D. Stussy 08-30-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... removeps-groups@yahoo.com 09-01-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Gene E. Utterback, EA, RF... 09-10-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Bill Brown 09-11-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... removeps-groups@yahoo.com 09-14-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Gene E. Utterback, EA, RF... 09-15-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... D. Stussy 09-01-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Gene E. Utterback, EA, RF... 09-10-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Seth 09-11-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Gene E. Utterback, EA, RF... 09-14-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Seth 09-16-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Mark Bole 09-17-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Seth 09-17-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Stuart A. Bronstein 09-17-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Seth 09-20-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Stuart A. Bronstein 09-20-2009  Re: Tax Efficient Gifting of Home Equity in Divorc... Seth 09-25-2009
Posted by W on August 30, 2009, 10:48 am Please log in for more thread options I have a friend who is getting divorced. It's going to be a financially devastating thing for her because she doesn't have a high enough income to cover the home expenses. Her husband has agreed to pay for her home mortgage and the child's education expenses. Assuming the husband is willing to give her 100% ownership of the home, what is the most tax efficient way to transfer all equity to her? A related question is won't the husband be removing his home interest deduction allowance if he gifts his share of equity in the home to her? Can the home's equity be transferred in full to the wife prior to the divorce being finalized without creating a taxable event for the wife? Can the husband claim any kind of deduction for this? Is there a more tax efficient way to do this, for both sides? Perhaps he could gift $12K of his equity each tax year until she owns all equity in the home? How would that need to be documented to satisfy the IRS? Perhaps she could buy out his interest and use a person to person loan and he could forgive non-payment of each month/quarter's interest/principal payments? (The total payments due each year would probably need to be under $12K?) She will of course consult attorney and accountant before finalizing a divorce, but at this stage she is trying to get some understanding of approaches that might work to everyone's advantage, and of approaches that she must avoid. -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Brew1 on August 30, 2009, 1:19 pm Please log in for more thread options > I have a friend who is getting divorced.   It's going to be a financially > devastating thing for her because she doesn't have a high enough income to > cover the home expenses.   Her husband has agreed to pay for her home > mortgage and the child's education expenses.    Assuming the husband is > willing to give her 100% ownership of the home, what is the most tax > efficient way to transfer all equity to her? > A related question is won't the husband be removing his home interest > deduction allowance if he gifts his share of equity in the home to her? > > Can the home's equity be transferred in full to the wife prior to the > divorce being finalized without creating a taxable event for the wife?   Can > the husband claim any kind of deduction for this? > > Is there a more tax efficient way to do this, for both sides?   Perhaps he > could gift $12K of his equity each tax year until she owns all equity in the > home?   How would that need to be documented to satisfy the IRS? > > Perhaps she could buy out his interest and use a person to person loan and > he could forgive non-payment of each month/quarter's interest/principal > payments?  (The total payments due each year would probably need to be under > $12K?) > > She will of course consult attorney and accountant before finalizing a > divorce, but at this stage she is trying to get some understanding of > approaches that might work to everyone's advantage, and of approaches that > she must avoid. > > -- > W > > Assets acquired in a divorce do not normally trigger any tax at all. The wrong way to do divorce (IMO) is for one spouse to cash out a position and then give the proceeds to the other spouse--that will trigger taxes for the original owner. You cannot claim a deduction for home mortgage/property taxes unless you owned an interest in the home and you made the payment(s). -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Mark Bole on August 30, 2009, 2:13 pm Please log in for more thread options W wrote: > I have a friend who is getting divorced. It's going to be a financially > devastating thing for her because she doesn't have a high enough income to > cover the home expenses. Is that what you are telling her, or what she thinks? Either way, that's a pretty limited and unrealistic view of her financial universe. > Her husband has agreed to pay for her home > mortgage and the child's education expenses. Assuming the husband is > willing to give her 100% ownership of the home, what is the most tax > efficient way to transfer all equity to her? > A related question is won't the husband be removing his home interest > deduction allowance if he gifts his share of equity in the home to her? But an alimony deduction (adjustment) is better than a qualified home mortgage interest deduction, because it reduces AGI and isn't subject to any limitations. I'd recommend as a first step to sort out what is child support, what is alimony, and what is a property transfer. Pub 504 is a good place to start. Community property issues, if applicable, will further complicate matters and vary from state to state. -Mark Bole -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by Arthur Kamlet on August 30, 2009, 2:58 pm Please log in for more thread options >W wrote: >> I have a friend who is getting divorced. It's going to be a financially >> devastating thing for her because she doesn't have a high enough income to >> cover the home expenses. > >Is that what you are telling her, or what she thinks? Either way, >that's a pretty limited and unrealistic view of her financial universe. > > >> Her husband has agreed to pay for her home >> mortgage and the child's education expenses. Assuming the husband is >> willing to give her 100% ownership of the home, what is the most tax >> efficient way to transfer all equity to her? >> A related question is won't the husband be removing his home interest >> deduction allowance if he gifts his share of equity in the home to her? > >But an alimony deduction (adjustment) is better than a qualified home >mortgage interest deduction, because it reduces AGI and isn't subject to >any limitations. > >I'd recommend as a first step to sort out what is child support, what is >alimony, and what is a property transfer. Pub 504 is a good place to >start. Community property issues, if applicable, will further >complicate matters and vary from state to state. And be sure this "alimony" meets the definition of alimony. Even if it does, if payments decrease or stop during the first three years, you maybe subject to Alimony Recapture. -- ArtKamlet at a o l dot c o m Columbus OH K2PZH -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Posted by W on August 30, 2009, 8:26 pm Please log in for more thread options > W wrote: > > I have a friend who is getting divorced. It's going to be a financially > > devastating thing for her because she doesn't have a high enough income to > > cover the home expenses. > > Is that what you are telling her, or what she thinks? Either way, > that's a pretty limited and unrealistic view of her financial universe. That's what she is telling me, but her expenses per month are $9K and she makes $3K per month. Does it take a PhD and $4K in consulting fees to realize there is a gap between the two? No matter how this ends up she needs to make a LOT more and spend a LOT less. > > Her husband has agreed to pay for her home > > mortgage and the child's education expenses. Assuming the husband is > > willing to give her 100% ownership of the home, what is the most tax > > efficient way to transfer all equity to her? > > A related question is won't the husband be removing his home interest > > deduction allowance if he gifts his share of equity in the home to her? > > But an alimony deduction (adjustment) is better than a qualified home > mortgage interest deduction, because it reduces AGI and isn't subject to > any limitations. If he pays her alimony to cover a home mortgage payment, then I guess he needs to size that payment so that the amount she receives post-tax covers the payment? And if she owns the home in full now she will claim the home mortgage interest deduction? The husband will reduce his income dollar-for-dollar even if he is well into AMT? Let's say the home mortgage payment is $4K / month and the husband is in the 35% marginal tax bracket. His state income tax in California is 10%. So $7200 of income pays the $4K mortgage with after-tax money. The husband has to pay $7200 to the wife in alimony - assuming she gets more income and her tax bracket stays at 35% - so that she can make the $4K payment with after-tax money. At the end of this the husband comes out the same in net pay as if he were to pay the $4K mortgage directly? If the husband pays the home mortgage directly, and instead continues to claim a home mortgage interest credit, does the wife in this case need to count those payments as income as well? > I'd recommend as a first step to sort out what is child support, what is > alimony, and what is a property transfer. Pub 504 is a good place to > start. Community property issues, if applicable, will further > complicate matters and vary from state to state. Based on that publication it sounds like some tax efficient things to do are: - Maximize child support payments since those are not subject to tax - Transfer ownership of assets before divorce is finalized to avoid taxation on the asset - Husband should gift the wife $12K per year after the divorce (if things stay amicable obviously) since those funds are tax free to the receiver The rules in 504 that pertain to reducing child support and converting to alimony and that reference contingencies for child support seem fairly complicated. -- W -- << ------------------------------------------------------- >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2007) - All rights reserved. >> << ------------------------------------------------------- >> Similar Threads Posted Giving up Home Equity in Divorce October 31, 2009, 9:42 am investment cost - home equity v.s. margin July 25, 2007, 6:22 pm Re: investment cost - home equity v.s. margin July 31, 2007, 3:37 pm Re: investment cost - home equity v.s. margin August 1, 2007, 4:26 pm How to pro-rate home equity interest deduction February 23, 2009, 11:39 pm Can I buy a foreclosure and repair the house with a Home Equity Loan? 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