Deborah S. Gibbon, CPA, CVA Gibbon Financial Consulting, LLC Direct (404)

Transfers in Divorce – Tips for Financial Planners Marital Residence Issues – Including Sale of Property Mortgage Interest and Real Estate Tax Deductions Ownership Interest in Multiples Homes Real Estate held in an LLC or Partnership Cancellation of Debt, Short Sale, and Bankruptcy

Nontaxable transfers of property in divorce known as “Equitable Division of Property” Basis carryover from transferor – built in taxes are issue Transaction treated similar to unlimited tax free gifting between spouses Distinguished from payment of alimony (generally a taxable event) and child support (a nontaxable event)

Tips for financial advisors: Titling of property generally does not matter in division of marital property Separate property is generally property owned at time of marriage and property inherited. Titling of separate property does matter Separate property can be transmutted (changed) from separate property to marital property based on titling and comingling with marital property

Tips for financial advisors: Issues arise when debt on separate property is paid down with marital funds or marital funds used to improve property Issues arise when a business owner uses his/her efforts or marital money to increase value of separate property Issues arise when no documentation of holdings at time of marriage and no statements kept during marriage to prove accounts kept separate

Tips for financial advisors: Separate property can be a factor the court considers when determining alimony (for both recipient and and payor) Georgia is an equitable division state – does not mean 50/50 division of assets Generally we are seeing reduced term of alimony and step down of alimony. The days of common lifetime alimony are gone

What happens to the marital residence during a divorce? Most common: Residence is immediately placed on the market and the parties split the proceeds (Issue – separate agreement typically entered into outside of the divorce agreement filed with the court) One spouse transfers his/her interest to the other spouse and receives other assets (Issue – refinancing to remove one party from debt not always possible)

What happens to the marital residence during a divorce? Less common: One spouse awarded the residence in exchange for a future payment (Issue – whether payment will be a % or fixed) Continuation of joint ownership until future sale date (Issue – residing spouse pays for upkeep or improvements, possible recoup on sale)

Gain on sale of marital residence Gain exclusion applies: Must be primary residence for two out of last five years. Exclusion applies to one sale every two years $250,000 if Single and $500,000 combined if each spouse has ownership of home upon sale (they each will have their $250,000) Gain follows the titling of home upon sale not the allocation of proceeds – important point that can cause issues upon sale If transferred to one spouse and then sold, 100% of gain taxed to receiving spouse

Taxpayer must have an ownership interest in the qualified home which secures the debt and an obligation on the mortgage The following assumes W is residing in home and H is paying the mortgage: Home is jointly owned and both are liable on the debt H can deduct one half of the mortgage interest Though H may not deduct the other half of the mortgage interest, H may be able to deduct the other half of the mortgage payment as alimony. W will have alimony income but will deduct her half of the mortgage interest Home is jointly owned, but only H is liable on the mortgage Husband can deduct 100% of the mortgage interest

Taxpayer must have an ownership interest in the qualified home which secures the debt and an obligation on the mortgage The following assumes W is residing in home and H is paying the mortgage. Home is owned by W and W is liable on the mortgage Though H may not deduct the mortgage interest, H may be able to deduct 100% of the mortgage payment as alimony Home is owned by H and H is liable on the mortgage Husband can deduct the mortgage interest as long as W’s occupancy is pursuant to a divorce or separation agreement

Taxpayer must have an ownership interest in the qualified home. The following assumes W is residing in home and H is paying the real estate taxes (either directly or via his payment of the escrowed taxes through a mortgage payment). Home is jointly owned Husband can deduct the property taxes Home is owned by W Husband may be able to deduct the payment as alimony Home is owned by H Husband can deduct the property taxes

Tax free transfer in divorce (Issue – suspended losses of one party transfer with the property, but are allowed for recipient as increase in basis only and will be recognized upon disposition) Interest and Tax Deductions - if claimed as rental, deduct all expenses and depreciation on Schedule E (Issue – beware of limits on mortgage of $1million for personal 1 st and 2 nd home) Gain on sale applies (Issue – if rental, basis is likely reduced by depreciation. Issue – if not rental, no capital loss allowed)

Transferability - the entity agreement will control - (Issue – how much control does one spouse or their business partner have regarding the entity and the interest being transferred?) Constructive Trust Concept – (Issue – how will capital calls be handled; fronted and paid back in end?) Gain or Loss on Sale of Real Estate Held – (Issue – gain or loss will follow titling of the entity irrespective of who gets cash) Suspended Passive Losses / Capital Loss Carryovers – (Issue – IRS has rules on how handled. Passive losses get added to basis upon transfer of interest; capital losses cannot be transferred between parties)

The IRS will generally tax cancellation of debt Exceptions: Mortgage Forgiveness Debt Relief Act of 2007 extended through 2016 allows exception for principal residence mortgages Bankruptcy / Insolvency Short Sale – make sure the lender releases the deficiency judgment Ways to Protect a Divorcing Spouse – have bankruptcy advice if potential for a bankruptcy filing after divorce