Rental Property after Divorce and Capital Gains

[Bonnie]

Did a return this year for a lady who had divorced in Dec 2012. Prior to divorce couple had 3 rental properties and at this time still jointly own them. For 2012 each reported half of income and half of expenses on their individual return Now they are thinking of selling one, giving set amount to wife and in turn she will sign her half of other 2 properties over to ex spouse. I'm pretty sure of the rental house sold, each would report half of capital gain on their individual return. I'm at a loss as to what happens when she signs her half over to ex husband on other 2 properties. Is there any type of capital gain she would have to report. Since it's result of divorce is there an exemption?? Not sure how to handle this next year and she's asking now prior to doing this. Thanks for any help.

[mactoolsix]

No gain or loss recognized if:

Property Settlements:
Transfer of property is transferred between former spouses if because of a divorce (incident to divorce).

Incident to divorce.
A property transfer is incident to your divorce if the transfer:

. Occurs within 1 year after the date your marriage ends, or
. Is related to the ending of your marriage.

These are from Pub 504 pages 18-19

http://www.irs.gov/pub/irs-pdf/p504.pdf

The property is considered received as a gift. Next few pages have examples of the basis adjustments.

A gift tax return may be required.

Upon the sale of a jointly owned property, they must share in the recognized gain or loss.

Mike

[DexEA]

Haven't had my coffee yet but

my first thought is it may or may not be a gift. More like a sale for the amount in excess of 50% of the gain? The gain would be split 50/50, if for example the gain is $100,000 each will report $50,000, but the set amount to wife is $80,000, in effect he bought her half of the other 2 properties of the for $30,000. Thoughts?

[Bonnie]

That was kinda my line of thought too, that what he gives her from the property sold is to buy her half of the other two properties so therefore not gift tax, but if I think along that line is there any other kind of tax consequences that I'm not thinking of??

[Bees Knees]

If the sale is within one year of the divorce, any transfer of property or cash from one spouse to the other is automatically treated as a gift, regardless of whether or not the transfer was specified in the divorce settlement [IRC §1041(c)(1)]. Thus no gain or loss and the one who keeps one of the rental properties gets the other spouse's share of basis.

AND, there is no election out of this treatment by either party. It does not matter how much the one spouse pays for his/her share of the former spouse's share of the property. Basis for the one who keeps the rental property is still based upon the other spouse's basis in the property.