Rental house given to ex spouse in divorce. Client had the mortgage in her name, see more...

[utah-arizona-taxlady]

The rental house fair market value was $557,000 when she was court ordered to give the house to her ex.  The mortgage owing was $268,000 and was only in my clients name.  The title was in both their names.  The divorce was final a year before the home changed hands but they went back to court a few months before the home for this court order.  My client received only $268,000 when he refinanced the home.  So she says she sold it at a $289,000 loss and wants to take that loss (of course after recapturing her depreciation) and carry it forward for a couple years.  I am torn.  I think she should only value the house at $278,500 (half of the $557K) since the title was in both their names but then again...I'm not sure.  Her argument is that she bought the rental house on her own she says right before they were married (but the title she says was in both their names?).  They were only together about 2 years.  BTW....her recapture of depreciation is almost $24,500 if that comes into play here.  Any help on this would be greatly appreciated.  Thank you ahead of time.  Give me all your great wisdom please oh wise-ones in the community!

[JRC]

Seems to be a division of property due to divorce and not a sale.

[utah-arizona-taxlady]

I agree but how do I treat it on her tax return?  It was rented for 6 months before he received it.  I've been doing taxes for 30 years and this is something new I have never had happen before.  Division of a personal home yes, not a rental.

[jeffmcpa2010]

You don't get a step up in basis to fair market value due to a divorce, so the Fair Market Value should not come into play.

I am not sure this is a sale in any case. (Probably an issue for state law).

In the State I am in, all of this transaction would be a portion of a property settlement, or property division, and there are almost never any tax affects of property settlements.

If there is a Taxable Sale - Her basis would be what she originally paid for the property (if she bought it before marriage as she says) less the depreciation she took over the years (or should have taken - that old allowed or allowable rule). Adjusted possibly for what ever transaction took place that possibly gave him an ownership interest in the house. 

Did she actually get $268,000 and used that to pay off the existing mortgage, or did she get 268, plus he paid off the mortgage?

What a mess. Not sure I contributed much but more questions.

[IRonMaN]

Report it as being rented for 6 months.  Then go to the asset worksheet and find the box to enter a sales date.  Enter the date she turned it over and don't enter any sales amount.  Delete all of the rental worksheets next year.  Problem solved!

[qbteachmt]

I feel this is like a word problem without all the details. For instance, was that payout to her after the mortgage transferred or refi, or did her mortgage get paid off or did she need to send in that amount to pay off that mortgage? Was the FMV of the property in the computation of the division of marital property, and she is forgetting, such as, "Okay, you keep the main residence worth $550,000 and half in debt, and he gets the rental at $557,000 that also is half in debt?"

[utah-arizona-taxlady]

It is a mess!  She lives in Utah.  I'll have to ask her but I think he refinanced and the money paid off her mortgage.  She said she doesn't have a settlement statement/HUD but he does.  Not sure what that means.  I have spoken to her since I sent the question.  She said she purchased the home before she was married but when they got a home equity loan on the rental house she added his name to the title.   So does she just quit the rental and not claim it next year.  What about the depreciation she did take since 2017?  OK, I just went in and I unchecked the box that said it was a taxable disposition and on the depreciation form I put the date of disposition and that's all.  I don't see any errors but I also don't see where the depreciation was added back in.  Could this be correct?

[utah-arizona-taxlady · Accepted solution]

IronMan, that is what I just did.  No errors.....I think this is how it will go.  She wanted the loss but I guess she can take her taxes to someone else if she doesn't like it!  I have gone over and beyond on this one! 

[utah-arizona-taxlady]

I read the court order.  It says he will pay her mortgage and keep the rental house.  So I guess that is what he did.  The court awarded the house they were living in and her other 2 rentals to her and it says all debt and titles are in her name only on those.  I am going to do what IronMan suggested....She won't be happy since she cant take the huge over $200K loss.  Oh well, that's how the cookie crumbles.

[IRonMaN]

Life is too short to deal with difficult people.  If she isn't happy, pack her up a box of cookies and tell her to hit the road!

[utah-arizona-taxlady]

I've never been divorced so I really don't know how this all works.  I guess I should have called my friend that has been through 3 of them...divorces that is!  Thank you everyone!

[qbteachmt]

"It says he will pay her mortgage and keep the rental house."

"since she cant take the huge over $200K loss"

It seems she got that money, and he is either paying that mortgage or paid it by refi. That means she has minimal loss.

If she had sold at $557k and paid off $268k debt = net $289k to her.

She got $268k. She's down $21k.

You want to value her half at $278.5k; she got $268k. She's down $10.5k.

She got off cheap.

[JRC]

She probably got the better of the deal.. No Depreciation recapture, No sales commission to pay or selling costs.

Received Cash.$$$

[BobKamman]

Tell her what she lost was a husband.  You will put that on the return.  Since she has shown that he was worthless, it will not result in a deduction.  

[utah-arizona-taxlady]

Thanks BobKamman.  This is what I needed to start my busy day!