Property Basis

[Jesse]

Couple purchased home in 1989 for $15,000.

Divorced in 1998 and husband paid property settlement of $40,000 for equity in the home.

In 2006 he relocated and turned this home into rental property.

Is his basis in the rental property $15,000 or $55,000 ($15,000 + $40,000).

[Jiggers]

Basis due to divorce

Couple purchased home in 1989 for $15,000.

Divorced in 1998 and husband paid property settlement of $40,000 for equity in the home.

In 2006 he relocated and turned this home into rental property.

Is his basis in the rental property $15,000 or $55,000 ($15,000 + $40,000).

His basis is always $15,000. Payments due to divorce are not taxable to the person receiving, nor deductible (or added to the basis) of the one paying.

The rental property basis is the "LOWER" of the FMV or basis. Probably the FMV is larger, so his basis in the rent property is still $15,000. If the FMV was lower than the $15,000, you would use the FMV.

[Jesse]

Thanks - that is what I thought - but hoping maybe I was wrong. It's nice to get reassurance sometimes!

FMV is much higher so the 15K is what we'll have to deal with.

[jancpa]

Property Basis

That all makes sense, but if the house was jointly owned, each person's share was worth $7,500 at purchase. At divorce, he bought her share for $40,000. Why wouldn't his basis then be $47,500, same as it would be if he had inherited half?

Just wonderin'

[jainen]

a good question

>>Why wouldn't his basis then be $47,500, same as it would be if he had inherited half?<<

That's a good question, one the client will ask. The answer is that he did not purchase her share. He traded cash for it in a non-taxable property settlement. Presumably his attorney considered the tax implications in negotiating the settlement, so now he is stuck with them.

Inheritance is a taxable event (even if exclusions reduce the tax to zero).

[S T]

Really Hard

It is a really hard concept to convey to the t/p on the property settlements due to divorce. However, doesn't the t/p does take the entire basis (cost) of the property rather than one-half of his and one half of hers?? The t/p that does the buyout of equity just doesn't get the benefit of that portion of equity step up?

Example:

H/W married joint purchased property (primary residence) for $600,000.

H/W divorce and property settlement arrives at FMV of $700,000, so husband has to buy out wife for $50,000 (one half of equity) plus one half of cost of $300,000.(corrected) Not addressing any loans, improvements etc.

So husband's basis is $600,000 and husband disregards the $50,000 property settlement above the total original cost basis. When SOH, section 121 occurs he starts with $600,000 plus improvements, etc.

Have I represented this correctly?

Sandy

[jainen]

what his wife wants

>>property settlement arrives at FMV of $700,000, so husband has to buy out wife for $50,000 (one half of equity)<<

Half of $700,000 is $350,000. That's what his wife wants.

[S T]

That is true

Jainen,

That is true, but I was only addressing the equity side for the basis factor. so I fixed my statement! You do keep us on our toes!

Sandy

[Davc]

His basis is always $15,000. Payments due to divorce are not taxable to the person receiving, nor deductible (or added to the basis) of the one paying.

The rental property basis is the "LOWER" of the FMV or basis. Probably the FMV is larger, so his basis in the rent property is still $15,000. If the FMV was lower than the $15,000, you would use the FMV.

Note that for a house purchased in 1989 they may have a deferred gain from a sale of a previous residence that would make their basis less than 15,000.