I'm so confused!

[MomIsWorried]

If anyone can help me with this, I'd really appreciate it!

I had a customer come in today to have her taxes done. She had the usual...W-2, 1099-INT ... no problem. Then she dropped the bomb on me.

She got married in 1990 ... her husband and his brother owned 27 acres of land and a single-wide trailer. In 1996, her husband bought out his brother's share of the land, adding her name to the land title also. They lived in the trailer for 2 years (96 and 97) ... then divorced in 1999. He sold the land in early 2005, and she had to fight him to get her share ... she ended up getting just a little over $80,000 (which was 25% of what he sold the land for) she then took the $80,000 and purchased a 2003 double-wide. The only paperwork she brought in was a paper from the attorney who handled her case against her ex, which states how much money she got from the sale of the house.

Now... what on earth do I do with all of that information?

Thanks in advance!

 

[Snipes5]

Wait and see if she gets a 1099-S. If not, it may well be classified as a gift.

Snipes

 

[abezon]

Since you got 1/4 of the proceeds, you get to claim 1/4 of the basis. His basis is what he paid for the original purchase + what he paid to buy out bro.

 

[LdiJ]

Although quite a few years have passed, this is a divorce property settlement. The proceeds should not be taxable.

 

[MomIsWorried]

LdiJ~ "Although quite a few years have passed, this is a divorce property settlement. The proceeds should not be taxable."

So does this mean she doesn't even have to put it on her tax return?

Snipes~ I assume those have to be postmarked by the 31st, too?

abezon~ "Since you got 1/4 of the proceeds, you get to claim 1/4 of the basis. His basis is what he paid for the original purchase + what he paid to buy out bro" I thought about that, too ... and asked her about it ... she says the ex is being difficult and won't give her that information ... how can she go about obtaining such information?

Thanks again!

 

[Snipes5]

Title company? County/City records maybe/Divorce settlement records. Do you live in a community property state?

No, I think those are supposed to be postmarked by Feb 15.

Snipes

 

[LdiJ]

LdiJ~ "Although quite a few years have passed, this is a divorce property settlement. The proceeds should not be taxable."

So does this mean she doesn't even have to put it on her tax return?

Snipes~ I assume those have to be postmarked by the 31st, too?

abezon~ "Since you got 1/4 of the proceeds, you get to claim 1/4 of the basis. His basis is what he paid for the original purchase + what he paid to buy out bro" I thought about that, too ... and asked her about it ... she says the ex is being difficult and won't give her that information ... how can she go about obtaining such information?

Thanks again!

As far as I am concerned it doesn't belong on her tax return because in my eyes its clearly part of the marital property settlement. However, on the off chance that a form 1099 S would get sent, its probably wiser for her to hold off until she is sure that she isn't going to get one.

 

[MomIsWorried]

As far as I am concerned it doesn't belong on her tax return because in my eyes its clearly part of the marital property settlement. However, on the off chance that a form 1099 S would get sent, its probably wiser for her to hold off until she is sure that she isn't going to get one.

Thanks everyone ... she came back in today and had received a 1099-S in the mail today. So, I guess that answers all of my questions.

Thanks again!

 

[Snipes5]

Caution. Just because she got one does not mean the income is taxable!

I would go with LdiJ's analysis that it may be part of a divorce settlement, and approach it from that angle.

If that is the case you can list it on Sch D with the basis and proceeds the same, and attach an explanation, and possibly a copy of any property settlement at the time of the divorce.

Snipes

 

[abezon]

LdiJ, a divorce settlement is not like an inheritance. There is no step up in basis when a person receives property in a divorce & one can have capital gains from selling divorce-settlement property. Her basis is that same as if she was gifted the land -- the owner's basis. The advantage of a divorce property settlement is that the person who *loses* title to the property doesn't have to report it as a sale at FMV. Now that he has finally sold the property, she has to pay taxes on her share of the capital gains.

That said, she may be able to exclude the gains using the principal residence exclusion. If the sale of a house is delayed by a divorce decree letting one spouse use the house, & that spouse uses the house as a principal residence for 2 of the 5 years prior to sale, the non-occupant spouse can claim the section 121 exclusion as if they had lived there too. If this applies, she doesn't need any basis info. Otherwise, get the atty to write another letter.

 

[LdiJ]

That said, she may be able to exclude the gains using the principal residence exclusion. If the sale of a house is delayed by a divorce decree letting one spouse use the house, & that spouse uses the house as a principal residence for 2 of the 5 years prior to sale, the non-occupant spouse can claim the section 121 exclusion as if they had lived there too. If this applies, she doesn't need any basis info. Otherwise, get the atty to write another letter.

That was my whole point abezon. Since its part of a divorce settlement she is entitled to her exclusion....which is 250k even if she only ended up with 25% of the equity. Therefore, there are clearly no taxable gains.

 

[abezon]

Yes, but she can only exclude gains if her ex can exclude gains. IE, if he was living in the place for 2 of the 5 years prior to sale. The facts given were that the place was bought in 96, owner-occupied for 2 years, then she divorced in 99. The divorce settlement happened in 99 & there was no taxable income from the settlement. However, if I receive the marital home in a divorce & rent it out for 6 years before selling, it is no longer my primary residence & I have to pay taxes on the gains. If my ex is still on the title, then my use of the home is imputed to my ex & my ex pays taxes on the gains too, even though if we'd sold the place at the time of divorce we both could have excluded gains.

There was no info about how the poster's place was used during the 6 years since divorce. If it's been rented the whole time, then this was not a sale of a primary residence, it was a sale of a rental house & the gains are taxable. Pubs 523 & 504 have more info on this.

 

[LdiJ]

Yes, but she can only exclude gains if her ex can exclude gains. IE, if he was living in the place for 2 of the 5 years prior to sale. The facts given were that the place was bought in 96, owner-occupied for 2 years, then she divorced in 99. The divorce settlement happened in 99 & there was no taxable income from the settlement. However, if I receive the marital home in a divorce & rent it out for 6 years before selling, it is no longer my primary residence & I have to pay taxes on the gains. If my ex is still on the title, then my use of the home is imputed to my ex & my ex pays taxes on the gains too, even though if we'd sold the place at the time of divorce we both could have excluded gains.

There was no info about how the poster's place was used during the 6 years since divorce. If it's been rented the whole time, then this was not a sale of a primary residence, it was a sale of a rental house & the gains are taxable. Pubs 523 & 504 have more info on this.

Ok...valid point.

 

[MomIsWorried]

Luckily I'm still working this return ... the client keeps bringing me stuff to add to it (she now wants to itemize deductions and see what happens).

Here's the scoop on the property ... it is 27 acres of land, which previously had a single wide trailer on it. Husband and wife lived in trailer for 2 years. Shortly after the divorce, husband sold (or otherwise disposed of) the trailer (she's not sure what happened to it) ... so this settlement the wife got is only for the land. She says the land sat vacant from early 2000 (roughly) until husband sold it in January of 2005. Total sale price was right around $320,000...of which she received $80,000 ($79,300 was for the land, plus $700.00 that husband owed her for their daughters braces). The easy part of this is knowing for certain that the $700 is not taxable because it was used as part of a child support order for medical purposes. It's the other $79,300 that I'm scratching my head over. Customer doesn't seem able (or willing) to get more information from her ex (such as what he paid for the land to begin with, and then how much he paid to buy his brother out in '96).

Snipes informed me several months ago that I'm still wet behind the ears ... and frankly, today I'm feeling rather soaked!

So...those of you who have done this for years and years ... how would you handle it, if a client presented you with this information?

 

[Snipes5]

If she refuses to get any more information, tell her the entire amount is taxable, (unless she can remember the purchase price, or you can find it through the county), and tell her if she won't help you, you can't get blood out of a turnip, so she will end up paying more tax than she should have to, because she refuses to do the necessary legwork.

If she wants to be difficult, that's certainly her prerogative, and she can pay for the privilege.

Just make sure you get this all in your notes, and get a supervisor or manager to sign off on it, so everyone is aware of what is going on.

Also be sure to charge for your time if you spend more than the ordinary amount of time on this return.

Snipes