I have a client that has been divorced for over 20 years. During the marriage they acquired 2 homes. One has been a rental since 1987 and the other is my taxpayer's principal residence. My taxpayer has been claiming the rental on her tax return as long as I have been doing her taxes. In March 2016 she quit claimed (interspousal transfer deed) her half of the rental to the ex and he quit claimed (interspousal transfer deed) his half of the principal residence to her. They now both are sole owners of a home. This has nothing to do with the divorce so this would not fall under "incident of divorce" rules. I am trying to determine how to show the disposition of the rental. I have been told it would be a sale and her selling price would be half of the principal residence she acquired. Does this sound right? Does the half of the rental she gave up get any consideration? If so it would pretty much be a wash. The way I have done it she has a huge balance due so want to make sure I handle this correctly. Have had many sleepless nights over this. Please help.
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I would be inclined to agree with the FMV of one-half of the principal residence being the consideration received for the disposition of the rental. It cannot be a like-kind exchange. It sounds like bartering which you might want to research. If she had depreciated 100% of the rental for over 20 years, its basis would be quite low and produce a sizeable gain, I would think. She probably should have been taking the depreciation @ 50% all those years if he was half-owner, although I would assume she was keeping all the income and paying all the expenses. -
Burke, Thank you for taking the time to respond. Yes property is fully depreciated and there is a hefty gain so that is why I am being extremely cautious. I agree it should have been split 50/50. Depreciation schedule was already set up when I took over so I continued with the way it had been set up. I will look into the barter possibilities as an option. MicheleComment
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Have the man and woman actually been divorced for 20 years? Or have they been separated for 20 years and just got divorced recently? If the former, how were they able to use interspousal transfer deeds for the transfers 20 years later?
If they were only separated all those years and just got divorced recently, then the transfers would be regarded as transfers incident to a divorce or transfers related to the cessation of marriage. The latter has a 6-year time limit, but it is rebuttable. See Regs ยง1.1014-1T (Q&A 7) for information about that.
If the situation was simply that after 20 years of being divorced, the ex's finally decided to separate their jointly owned property, then yes, she "sold" the rental property to her ex and used the proceeds to "purchase" from him his 50% interest in the personal residence. If there were appraisals made of the properties at the time, use them as evidence of the FMVs. If there were no appraisals, I would recommend that they arrange to get them done ASAP. After-the-fact appraisals are done all the time. The parties might encourage the appraiser to make the appraisals as low as possible.
Regarding the W's gain, if she was keeping all the rents, then it is only right that she took all the depreciation ... in essence treating the rental property as her own the entire time.
I do not see any bartering aspects to this.Roland Slugg
"I do what I can."Comment
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Thank you Roland. Yes they in fact have been divorced since 1993. I'm not sure how they were able to do the Interspousal transfer. I wondered that myself. The reason for the transferring of property after all this time is the ex wants to take a reverse mortgage against the rental and she didn't want any part of that so this was their solution to split the property. Expensive decision on my clients part. I can now file the return with confidence. :-)Comment
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No kidding! The ex can't get a HECM on rental property anyway. Maybe he's going to move into it.Originally posted by MicheleRoland Slugg
"I do what I can."Comment
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