Best Place Real Estate

I met an income tax specialist at a recent networking event. We discussed real estate and divorce and taxes. Later in the day I received an email from him that I copied and pasted below. It just goes to show the importance of consulting qualified professionals during the divorce process.

Hi Marion,
As we left breakfast, I realized I did not mention one of the most important tax issues for couples pre-divorce.
If they plan to file taxes separately, they may be advised that they must file “Married filing separately.” This is the most penalized way to file. If they have been living separately for the last six months of the tax year including December 31, there are better alternatives. I have a Chamber member in this situation and her CPA, who she had been using for many years, told her she must file “Married filling separately.” I had to PROVE to the CPA that that was not the case. She saved over $1,000 in taxes. She is now my client and I can give you her reference if you wish.
If I can assist you, I would be most pleased to do so.
Phil

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TaxXpert@cox.net
Direct: 949.241.6598
Fax:949.951.9491
It’s not how much you get —
it’s how much you get to keep.

Common divorce scenarios:

• A couple is going through a divorce. One spouse wants to keep the house and agrees to make the payments. The other spouse wants to rid himself or herself of the house all together.

or

• Due to the recent decline in the market, the house has lost value and there is little or no equity. Even worse, the house may be worth less than the loan balance. One spouse wants to sell the house even if they have to do a short sale. The other wants to keep it until the market turns around.

So the “out spouse” says, “OK, if you want to keep the house, I will quitclaim title and then it will be all your responsibility. I will not have to deal with it any longer.

Seems like a simple solution, but there is a major problem with it if both husband and wife are on title and both are on the loan. While you may be able to quitclaim title (take your name off the Grant Deed), you can not arbitrarily take your name off the loan (Deed of Trust). Anyone on the loan is individually 100% responsible for the loan. If you quitclaim title but remain on the loan, you are then responsible for a loan on a property in which you no longer have any interest. Not a good thing.

Even if it is agreed that your spouse will make the payments, you are at risk. If for some reason your ex is late or behind on the payments, your credit score will suffer. In addition, the loan will be included in your debt to income ratio which could impact your ability to purchase another home in the future.

Laurel Starks does an excellent job of explaining this issue in her article Divorce & Your House: Leaving your ex-spouse in control of the house….and what else?

I think the main point here is the importance of making informed decisions during the divorce process so you can move on with peace of mind after it is settled.

Many savvy investors buy and sell real estate by doing 1031 exchanges. With the decline in real estate prices over the last few years, some investors may think they are selling a property at a loss and therefore do not need to do another 1031 exchange. But before you do anything, be sure and consult a tax professional because you may have a taxable event. If you acquired the property through a 1031 exchange and are now selling the property for a lower price than you paid for it, you may actually have a gain instead of a loss. The key to remember is that with a 1031 exchange you carry the adjusted cost basis from one property to the next.

Consider this scenario. Let’s say that several years ago you sold a rental property for $350,000. The adjusted cost basis of that property was $100,000 so you had a gain of $250,000. Rather than pay the taxes on the $250,000 gain, you deferred the taxes and bought another property through a 1031 exchange. You paid $350,000 for the new property.

Now in 2009, the property you purchased for $350,000 is only worth $250,000. Even though this is $100,000 less than you paid for it, you still have a gain of $150,000. Remember that you transferred the $250,000 gain from the first property to this property. After you deduct the $100,000 loss, you are left with a taxable gain of $150,000.

This is a very over simplified example, but the point is that if you have bought or sold, or plan to buy or sell through a 1031 exchange, consult a good tax professional first.