Tax Efficient Gifting of Home Equity in Divorce

Posted by Mark Bole on August 30, 2009, 9:07 pm

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W wrote:

>> 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.

Regarding your last paragraph, I thought it was the other way around:
alleged alimony that could be considered instead to be child support,
under the "wrong" circumstances.

In general, as soon as you say "tax efficient", you have to question,
"for whom?" Isn't there a conflict of interest here? Start with
something basic, such as, what filing status will be used until the
divorce is final, and thereafter?

-Mark Bole

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Posted by W on August 31, 2009, 2:04 pm

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> W wrote:

> >> I'd recommend as a first step to sort out what is child support, what

> >> 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

> > alimony and that reference contingencies for child support seem fairly

> > complicated.

> Regarding your last paragraph, I thought it was the other way around:

> alleged alimony that could be considered instead to be child support,

> under the "wrong" circumstances.

I did not read the entire 504 publication. I was looking at child support
sections in 504 that talked about contingencies that could be used as a
reason to stop paying child support.

> In general, as soon as you say "tax efficient", you have to question,

> "for whom?" Isn't there a conflict of interest here?

Well it all looks complicated. On one hand, failure to pay child support
has a legal recourse in some states as a crime. Failure to pay alimony is
a civil matter, and probably difficult to force a collection.

>From the husband's point of view, paying alimony has tax advantages over

child support. From the wife's point of view, it's reversed.

So you have to calculate tax issues as well as think long term about what is
most likely to continue to be paid.

> Start with

> something basic, such as, what filing status will be used until the

> divorce is final, and thereafter?

I assume the easiest thing to do is to file 2009 as normal, complete divorce
in 2010, and file 2010 as two single returns? (Wife may be head of
household because of child.)

--
W

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Posted by removeps-groups@yahoo.com on September 1, 2009, 3:51 pm

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> 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.

Since the interest on the mortgage is deductible, the number $7200 may
be too much. Suppose all $4000 is mortgage interest, then it is fully
deductible. And if your other deductions are >= the standard
deduction, the $4000 is really fully deductible, so you need only 4k
of after-tax money to pay the mortgage.

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Posted by Gene E. Utterback, EA, RFC, AB on September 10, 2009, 6:40 pm

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>> 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.

> Since the interest on the mortgage is deductible, the number $7200 may

> be too much. Suppose all $4000 is mortgage interest, then it is fully

> deductible. And if your other deductions are >= the standard

> deduction, the $4000 is really fully deductible, so you need only 4k

> of after-tax money to pay the mortgage.

While we all do it save bandwidth, I hate it when messages get snipped -
makes it hard for me to follow and I sometimes end up putting my foot in my
mouth - with that little accouncment . . .

I'm not sure the husband can deduct the mortgage interest if he isn't living
there. To deduct the mortgage interest you have to meet two tests -

1 - you have to have a legal obligation to pay;
2 - it has to be your primary or secondary home.

H may meet test 1 - his name is still on the note.

But how can he meet test 2?

Gene E. Utterback, EA, RFC, ABA

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Posted by removeps-groups@yahoo.com on September 14, 2009, 8:30 pm

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On Sep 10, 3:40 pm, "Gene E. Utterback, EA, RFC, ABA"

> >> 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% marginaltaxbracket. His state incometaxin California

> >> is

> >> 10%. So $7200 of income pays the $4K mortgage with after-taxmoney.

> > Since the interest on the mortgage is deductible, the number $7200 may

> > be too much. Suppose all $4000 is mortgage interest, then it is fully

> > deductible. And if your other deductions are >= the standard

> > deduction, the $4000 is really fully deductible, so you need only 4k

> > of after-taxmoney to pay the mortgage.

> While we all do it save bandwidth, I hate it when messages get snipped -

> makes it hard for me to follow and I sometimes end up putting my foot in my

> mouth - with that little accouncment . . .

> I'm not sure the husband can deduct the mortgage interest if he isn't living

> there. To deduct the mortgage interest you have to meet two tests -

> 1 - you have to have a legal obligation to pay;

> 2 - it has to be your primary or secondary home.

> H may meet test 1 - his name is still on the note.

> But how can he meet test 2?

Publication 504 says that if you are required to pay the entire
mortgage as part of the divorce agreement, half of the payment is
alimony, and half is deductible on your tax return. Search for
"Payments for jointly-owned home" in
http://www.irs.gov/publications/p504/ar02.html.
So it looks like you can deduct the mortgage interest even if it is
not your primary or secondary home.

>From section 163 at

http://www4.law.cornell.edu/uscode/26/usc_sec_26_00000163----000-.html

(4) Other definitions and special rules
For purposes of this subsection—
(A) Qualified residence
(i) In general The term “qualified residence” means—
(I) the principal residence (within the meaning of section 121) of the
taxpayer, and
(II) 1 other residence of the taxpayer which is selected by the
taxpayer for purposes of this subsection for the taxable year and
which is used by the taxpayer as a residence (within the meaning of
section 280A (d)(1)).

The key thing is "within the meaning of section 121".

And section 121 says the following:

(B) Property used by former spouse pursuant to divorce decree, etc.
Solely for purposes of this section, an individual shall be treated as
using property as such individual’s principal residence during any
period of ownership while such individual’s spouse or former spouse is
granted use of the property under a divorce or separation instrument
(as defined in section 71 (b)(2)).

So it looks like mortgage interest, or half of it, an be deducted by
the one making the mortgage payments. What always confuses me though
is whether the person who is divorced at does not lived in the house
can deduct mortgage payments for three houses -- the former home that
he/she lived in as the primary home, their new primary home, their new
secondary home.

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