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Claiming equity payment to ex as alimony, seems to fit the alimony rules!

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inthetrailer

Junior Member
Hello,

I got divorced last year and paid alimony since the divorce, which I am claiming. No questions about that. However, as part of the divorce agreement and court ordered settlement, I had to pay my ex a $20,000 payment in exchange for her portion of the equity in the house (which I kept). HOWEVER, this payment also meets all the criteria in IRS Pub 504 for alimony! (page 14) Because...
  1. It was in cash (a check)
  2. It was not designated as "not alimony"
  3. We were not members of the same household
  4. There is no after death payment liability
  5. It was not treated as child support
and it passes the definition of alimony on page 12: "Alimony is a payment to or for a former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument."
Therefore, it would seem to me that I can include it under my alimony payment total.

Here's a link to Pub 504: http://www.irs.gov/pub/irs-pdf/p504.pdf

Playing devils advocate, a friend of mine agrees with me on the above, but says the Property Settlement section on page 18 applies and thus nullifies it as alimony. Quick text from that section reads "Generally, no gain or loss is recognized on the transfer of property from you to your spouse/former spouse if incident to your divorce. This rule applies even if the transfer was in exchange for cash, release of marital rights, assumption of liability" etc. I do not dispute this payment was in exchange for cash and release of marital rights at all. My understanding of the "gain or loss" reference in this section is with regards to property value and recording gain or loss of property itself on your taxes, NOT whether it fits the definition of alimony (and thus, gain or loss of taxable income, although now that I write this out I don't know how you can show a loss on taxable income so it must be referring to property only). Also, it doesn't state that if it meets this criteria it cannot count as alimony, either.

So what do you think? Am I correct in thinking the payment in exchange for her equity in the property ALSO qualifies as alimony? It sure seems like it to me... please let me know your thoughts!

TIA!
 


TinkerBelleLuvr

Senior Member
Hello,

I got divorced last year and paid alimony since the divorce, which I am claiming. No questions about that. However, as part of the divorce agreement and court ordered settlement, I had to pay my ex a $20,000 payment in exchange for her portion of the equity in the house (which I kept). HOWEVER, this payment also meets all the criteria in IRS Pub 504 for alimony! (page 14) Because...
  1. It was in cash (a check)
  2. It was not designated as "not alimony"
  3. We were not members of the same household
  4. There is no after death payment liability
  5. It was not treated as child support
and it passes the definition of alimony on page 12: "Alimony is a payment to or for a former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument."
Therefore, it would seem to me that I can include it under my alimony payment total.

Here's a link to Pub 504: http://www.irs.gov/pub/irs-pdf/p504.pdf

Playing devils advocate, a friend of mine agrees with me on the above, but says the Property Settlement section on page 18 applies and thus nullifies it as alimony. Quick text from that section reads "Generally, no gain or loss is recognized on the transfer of property from you to your spouse/former spouse if incident to your divorce. This rule applies even if the transfer was in exchange for cash, release of marital rights, assumption of liability" etc. I do not dispute this payment was in exchange for cash and release of marital rights at all. My understanding of the "gain or loss" reference in this section is with regards to property value and recording gain or loss of property itself on your taxes, NOT whether it fits the definition of alimony (and thus, gain or loss of taxable income, although now that I write this out I don't know how you can show a loss on taxable income so it must be referring to property only). Also, it doesn't state that if it meets this criteria it cannot count as alimony, either.

So what do you think? Am I correct in thinking the payment in exchange for her equity in the property ALSO qualifies as alimony? It sure seems like it to me... please let me know your thoughts!

TIA!
equity buyout = NOT alimony but EQUITY BUYOUT.

You pull that stunt and I can guarantee the IRS will have your tushy cuz they will audit your X for that same amount. Haul out a court order and it will be evident that it was a property settlement.
 

inthetrailer

Junior Member
equity buyout = NOT alimony but EQUITY BUYOUT.

You pull that stunt and I can guarantee the IRS will have your tushy cuz they will audit your X for that same amount. Haul out a court order and it will be evident that it was a property settlement.
I am not disputing it was an equity buyout. What I am saying is the $20k payment also meets the alimony definition AND passes the 5 tests of alimony as well... and yes, I believe you are correct that she probably did not claim that amount and one of us would be getting audited.
 

LdiJ

Senior Member
I am not disputing it was an equity buyout. What I am saying is the $20k payment also meets the alimony definition AND passes the 5 tests of alimony as well... and yes, I believe you are correct that she probably did not claim that amount and one of us would be getting audited.
Ok..one tax professional is telling you that you cannot deduct an equity buyout as alimony. Now, a second tax professional is telling you that you CANNOT deduct an equity buyout as alimony. If you need to hear it from three or four professionals we can probably arrange that.
 

tranquility

Senior Member
Three!

We had an alimony/settlement issue this year which was very difficult. It was clearly a property settlement, but the settlement documents called it alimony. Big money too. While the intent of the parties is a factor, the issues in the cases really look at the facts. We know that if it is not treated the same way between the two parties (who may not be that cooperative with each other), the IRS will audit. How will you explain that if the ex died immediately after the agreement you would still owe the money?

Look also to the Alimony Recapture Rule.
 

OHRoadwarrior

Senior Member
You cannot change the nature of a property distribution. Alimony is maintenance, not the relinquishment of another persons property interest, in your possession.
 

inthetrailer

Junior Member
Three!

We had an alimony/settlement issue this year which was very difficult. It was clearly a property settlement, but the settlement documents called it alimony. Big money too. While the intent of the parties is a factor, the issues in the cases really look at the facts. We know that if it is not treated the same way between the two parties (who may not be that cooperative with each other), the IRS will audit. How will you explain that if the ex died immediately after the agreement you would still owe the money?

Look also to the Alimony Recapture Rule.
Interesting, thank you for the response. I think if my ex died immediately after the agreement I would not owe any money at all? Who would I pay it to? If she had died I wouldn't have needed to refinance to get her off the mortgage or buy out her equity in the home. Our agreement does state that all alimony payments cease on death.

For the record LdiJ, my friend is an accountant at a corporation, not a tax professional, and he agrees with my point that it meets alimony requirements (but says it is moot because it is related to property). I used the "Ask a Tax Professional" service through taxslayer yesterday and their response was that it DID qualify as alimony. However, you can see how much I trusted that opinion as well. If the folks responding here are indeed tax professionals and agree that it doesn't qualify as alimony, then I believe we have a quorum and I can drop it. I may pay an attorney to look into it later on, and if it seems favorable I can always refile...
 

inthetrailer

Junior Member
Ok, I think I get it now. If the equity payment was still payable after her hypothetical untimely death then it would fail one of the alimony rules. But... she is still alive, and the payment was made... :) I know, I know.

The alimony recapture rule is covered in the pub I linked to. Interesting, but it wouldn't change any figures in my case.

Thanks for the replies. I think I understand why the IRS would reject it as alimony now even though the payment technically met the alimony rules.
 

Zigner

Senior Member, Non-Attorney
You are misinterpreting the section related to the payment being designated as "not alimony."

Your divorce instrument (the decree) designates the payment as not being alimony. It doesn't have to be written on the check itself.
 

tranquility

Senior Member
I think I understand why the IRS would reject it as alimony now even though the payment technically met the alimony rules.
Taxes are all technical. If it met the alimony rules (as interpreted by the courts), it would be alimony. This is not. You would have had to pay it even if wife died immediately.

As to the numbers and the recapture rule, how so? I think you're wrong there too, but I don't have the numbers.
 

davew128

Senior Member
This whole discussion is sort of a moot point anyway. This IS a property settlement incident to a divorce and that right there much ends the while discussion.
 

Zigner

Senior Member, Non-Attorney
This whole discussion is sort of a moot point anyway. This IS a property settlement incident to a divorce and that right there much ends the while discussion.
I know that.
You know that.
Everybody else knows that.

The OP was just hoping to find a loophole.
 

davew128

Senior Member
I know that.
You know that.
Everybody else knows that.

The OP was just hoping to find a loophole.
Except that the code section for divorce settlements is one of those areas that is iron clad. The language reads something like "Regardless of the provision of any other code section, a transfer of property incident to a divorce settlement shall be a nontaxable transaction" or something pretty close to it. There are no loopholes.
 

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