Tax Efficient Gifting of Home Equity in Divorce

Posted by Stuart A. Bronstein on September 20, 2009, 11:58 pm

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sethb@panix.com (Seth) wrote:

>>Courts generally find reciprocal transactions that seem to allow

>>you to do something you otherwise would not be allowed to do, to

>>be shams and disallow them.

> But I really wanted the house with 3 bathrooms, and he really

> wanted the one with a larger kitchen.

Trading homes is one thing. Trading homes and increasing the basis
by $500,000 each is entirely another.

>>For example if you create a trust for yourself, you can't

>>protect trust assets from your creditors. But if you create a

>>trust for someone else, you can. However if A creates a trust

>>for B and B creates a trust for A, the protection from creditors

>>is disallowed.

> Cash is fungible. Real estate isn't.

The situation that started this was the suggestion that husband and
wife who are divorcing, sell their property to a third party, and the
wife will then buy it back for very slightly over that price. The
goald would be for her to have an increased basis as the result of
what would normally be considered a transfer incident to a divorce,
which would not result in an increase in basis.

That kind of thing is referred to as a collapsible transaction. When
a series of permitted transactions appear to be done for the purpose
of accomplishing a non-permitted goal, the middle steps can be
ignored and as a result the goal would not be accomplished.

In the suggested situation the IRS would be able to reject the wife's
claim of an increase in basis because the middle steps would be
essentially useless ones except to accomplish a goal not permitted by
the tax code.

--
Stu
http://downtoearthlawyer.com

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Posted by Seth on September 25, 2009, 12:31 pm

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>> Its also worth noting that there is no requirement that the tax

>> laws be fair or logical, only that they be complied with.

>If the tax laws (or any law for that matter) was necessarily fair and

>logical, a lot of lawyers would be out of jobs.

No, they'd have even more work, arguing over whether a particular law
was "fair and logical".

Seth

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<< ------------------------------------------------------- >>
<< 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. >>
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