Constructive Receipt?

[Super Mom]

I have a client that asked me a question today I was unsure of. Her and her sister inherited a house and it sold this year. They each got some kind of paper for the sale (they sold to the county maybe?????). Anyway, her sister got her check, however my client's check went to her lawyer to be held in a trust account because she is going thru a divorce proceeding. She wants to know if she has to pay taxes on that money this year, since she can't get any of the money.

[TaxGuyBill]

I would say yes, it is reported on this year's tax return because her "agent" received the funds and the funds are not restricted due to the sale of the property (they are restricted due to other circumstances).

[taxea]

I agree. It is constructively received.

[Burke]

You need for her to provide more information. It may not be taxable at all, but she will have to report it on Sche D regardless. You said they inherited the house. When? What was its Fair Mkt value at the date of death? Was it sold for more than that? Were there expenses? Have her furnish you with a copy of the HUD-1. You need to calculate basis and she may well have a deductible capital loss if she did not live in it or rent it out.

[Super Mom]

You need for her to provide more information. It may not be taxable at all, but she will have to report it on Sche D regardless. You said they inherited the house. When? What was its Fair Mkt value at the date of death? Was it sold for more than that? Were there expenses? Have her furnish you with a copy of the HUD-1. You need to calculate basis and she may well have a deductible capital loss if she did not live in it or rent it out.

Thanks Burke, I plan to check all that when I do her return. Hopefully, none will end up being taxable, or even better if she has a loss!!

[BOB W]

Usually during a divorce a copy of the tax return needs to be provided to the other party's attorney, the sale will show there. But, it is my understanding that inheritance is not a marital asset as long as the proceeds are not comingled with the spouse. Then again, it may still may interfere with ultimate ruling as to how the spouse will survive, like issues in alimony and such. Just saying!

I think your client's lawyer will be creating a false document to the courts, that should of been amended, that may back fire at a later date.