Mrs. Rangel's tax return

[BHoffman]

A high income couple with one child lived together for all of 2008. Sadly, Hubby strayed and Wife kicked him to the curb. Wife is my client.

They jointly owned a residential rental, resulted in a loss of around $40k. Income is too high for any loss to be taken in 2008. Can't itemize. Taxes due are around $10k.

Hubby is making some noise about not claiming the rental and deducting interest and taxes on Sch A. Wife wants to file MFS and claim the child. Hubby has no problem with that. Wife wants nothing to do with evil plot and wants to give him of the income/expenses associated with the rental house and wash her hands of it. So far it's all just talk, so I hope the eager enforcement beaver will just let that alone for now and not hijack the thread.

So, what do I do on Wife's MFS return if Hubby makes good on his evil plot? Should she itemize if he follows through? Will this affect her innocent/injured spouse status?

She will receive a larger refund if Hubby does the right thing. What about that?

Ouch. Divorce is so ugly, and I'm dealing with two of them this year - high incomes and lots of animosity. Not a good mix.

[MomBob]

Do you live in a community property state? It doesn't matter what the husband does, if she files MFS she needs to do her return the correct way if she has all the info, which is claim half of their combined income, if they live in a community property state.

[BHoffman]

Do you live in a community property state? It doesn't matter what the husband does, if she files MFS she needs to do her return the correct way if she has all the info, which is claim half of their combined income, if they live in a community property state.

They do not live in a community property state. Sorry for leaving out that important info.

[Nashville]

Whose Dog Is It?

Whose Dog Is It, Charlie Brown?

If they jointly own the rental property (or any property) they cannot arbitrarily decide which one gets to claim this income and which one gets to claim expense.

If filing separately, each spouse is relegated to report the effect (revenue or expense) of the separate property, plus some reasonable allocation of the joint property. The "reasonable allocation" cannot be just "ever which one of 'em wants to show it...." Absent any other allocation method, 50-50 should be used.

She should report her half correctly, and if filing separately, she won't be accountable for his "evil plot."

[BHoffman]

Whose Dog Is It, Charlie Brown?

If they jointly own the rental property (or any property) they cannot arbitrarily decide which one gets to claim this income and which one gets to claim expense.

If filing separately, each spouse is relegated to report the effect (revenue or expense) of the separate property, plus some reasonable allocation of the joint property. The "reasonable allocation" cannot be just "ever which one of 'em wants to show it...." Absent any other allocation method, 50-50 should be used.

She should report her half correctly, and if filing separately, she won't be accountable for his "evil plot."

Well that throws this into a different light. I thought the deduction could be taken by the spouse who paid the expense, like medical expenses. Hubby earns more than 3X more than Wife, so figured that would be a reason. If I'm figgering wrong, will you let me know?

If she reports her half correctly, then she's going to show a $20k loss from Sch E and nothing on Sch A. She wants to avoid the entire house effect because she isn't sure what he's going to do.

Thanks for responding.

[Nashville]

Actual Payment

Yes, if there is one spouse who took all the revenue and paid all the expenses, then the operation would not have to be allocated. That spouse could report it all, if that's what really happened.

Hard to imagine one spouse "paying" for depreciation (which is not involved in cash). But if one spouse actually borrowed the money and made all payments, a case could be made for that as well.

[BHoffman]

Yes, if there is one spouse who took all the revenue and paid all the expenses, then the operation would not have to be allocated. That spouse could report it all, if that's what really happened.

Hard to imagine one spouse "paying" for depreciation (which is not involved in cash). But if one spouse actually borrowed the money and made all payments, a case could be made for that as well.

What it comes down to is this:

Hubby might want to play fast and loose with the rental on his MFS return. It's a maybe, not a given.

Wife wants nothing having to do with the rental house on her return.

I just want to prepare Wife's return correctly and in accordance with the law.

Based on the info, any suggestions?

This is frustrating

Thanks for your help and advice.

[Nashville]

I would apply

all of the rationale above that we have discussed. That doesn't give you a specific roadmap, but does set boundaries. And you will have to determine what is correct for your client.

If you are preparing the return for the wife and not the husband, I believe you can rely on the information she gives you, so long as you are not aware of inconsistencies. If this wife tells you she did not take any of the rental proceeds and made no such related disbursements, then I think you should honor that and simply leave all the rental reporting to husband. If she had access to proceeds and took some of them, even for joint household needs, then there is a problem. One such acid-test would be the use of a joint bank account for this -- it would then be difficult to purport that proceeds were never used.

The situation becomes infinitely more complex if you are trying to do the return for both husband and wife. This is a built-in conflict-of-interest and should be avoided, especially in a situation like you have described.

[BHoffman]

all of the rationale above that we have discussed. That doesn't give you a specific roadmap, but does set boundaries. And you will have to determine what is correct for your client.

If you are preparing the return for the wife and not the husband, I believe you can rely on the information she gives you, so long as you are not aware of inconsistencies. If this wife tells you she did not take any of the rental proceeds and made no such related disbursements, then I think you should honor that and simply leave all the rental reporting to husband. If she had access to proceeds and took some of them, even for joint household needs, then there is a problem. One such acid-test would be the use of a joint bank account for this -- it would then be difficult to purport that proceeds were never used.

The situation becomes infinitely more complex if you are trying to do the return for both husband and wife. This is a built-in conflict-of-interest and should be avoided, especially in a situation like you have described.

Thanks Nash. I'm not touching Hubby's return with a 10 foot pole.

Hubby will be able to itemize even without the rental interest and taxes because his state withholding was high.

They have agreed that Wife can claim the child. I'm still looking to make sure there isn't a problem with that.

My research is indicating no rental losses allowed for MFS anyway because they lived together during all of 2008. No matter what, at least her 2008 tax will work out the same whether she files Sch E or not. Still have to think about that one and discuss with her some more.