Kea Posted February 13, 2010 Report Share Posted February 13, 2010 Client bought house with (now) ex-wife in Feb 2003. He went to school out of state from 2005 - mid- 2007. (Yes, this is the same client that couldn't get home buyer's credit.) He lost residency of the house in January 2007 when then-wife served him divorce papers. From Feb 2003 - June 2007, she used a room as home office. From July 2007 - Nov 2009, he rented out the house. House was sold Dec 2009. Per divorce, ex-wife owned house, ex-husband owned mortgage & property tax (both in his name). After closing, proceeds of sale were split equally between ex-spouses. After (all) depreciation recapture, there was a loss on the sale of $5000. He meets 2 out of 5 year test for house to be his principal residence. He was renting it out for over 2 years prior to sale. Does loss count as personal loss (no deduction) since he meets 2 out of 5 test? Does loss count as rental loss since it was a rental up until it was put up for sale? Does it just revert to "personal" since technically ex-wife sold house? (He did have a complete original set of closing docs. And he received 1/2 of proceeds. So he was involved in sale.) I assume rental classification stops when renter moved out and house was put on the market. So depreciation, mortgage and real estate taxes stop going to Schedule E at that point. Or do they continue until sale date? Only reason renter moved out was so the house could be sold. Thanks so much. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 13, 2010 Report Share Posted February 13, 2010 >>He did have a complete original set of closing docs<< Good! Tell him you need to read them. And the complete divorce decree. And the rental agreement. Then--READ them! Since "ex-wife owned house," how come "HE was renting it out"? How do you figure it was his principal residence in 2006 since he moved out the year before and never returned because his marriage was breaking up while he was soon to be married to someone else? Can I make a guess? I guess he had no gain or loss because his half of the sale was simply a property settlement pursuant to the divorce decree in which title had been transferred to his former sweetie. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 13, 2010 Author Report Share Posted February 13, 2010 The reason I considered the house to still be his personal residence in 2006 was because he was still filing a joint return and still using that address. When he went to school out-of-state, it was considered a temporary absence. At least it was then. I agree that the whole division thing on that seemed strange. If it was HER house, why did HE get any proceeds of sale? I think the only reason it became a rental at all was that they didn't want to sell in 2007 with the depressed prices. Their crystal ball didn't tell them that the prices would stay low. Thanks. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted February 13, 2010 Report Share Posted February 13, 2010 Please correct me if I'm wrong in what I'm about to say, but I remember reading (don't ask me where) that if a personal residence has been turned into a rental, the personal residence exclussion has to be divided by the time lived in and used as a rental. I don't believe a full exclusion can be taken. And please, Jainen feel free to beat me up on this, but in the back of my mind I believe there was a change starting with 09. Deb! Quote Link to comment Share on other sites More sharing options...
Kea Posted February 14, 2010 Author Report Share Posted February 14, 2010 Your memory is correct, but it applies only to houses that were converted after they changed the rule -- a year or so ago. I remember telling this client (and one other) about it but also letting them know that it didn't apply to them since they had already converted. Plus, in this case, it's a loss. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 16, 2010 Author Report Share Posted February 16, 2010 OK, Here's what I've learned from my reading. I was wrong when I said ex-husband got the mortgage & property tax in the divorce settlement. In fact ex-wife got house and all financial responsibility & right to live in the house (she moved out anyway). Even though she got the house and all the corresponding debt, it was also set up that when they sell the house they have to agree to a price and split the proceeds. (Seems contradictory -- if she owns it and is responsible for it, why should he have anything to do with the selling price or proceeds? But, that's what the divorce said.) They couldn't agree on a selling price and realized even if they did, they wouldn't find a buyer that would agree with them. Verbally (not in decree) ex-wife tells ex-husband that she can't afford to make the payments. (She makes $20-30K as a singer & he makes $150K as a software guy.) He tells her he'll take care of the mortgage and property taxes. Title of house changes to her name, but mortgage & property tax remain in his name. Because they couldn't / wouldn't sell the house at that time, the ex-husband rents it out for over 2 years. Lease is between him and tenant. Ex-wife is not involved, but is aware of it (doesn't sound right to me but it's what happened). I'm thinking that he does not take the $5000 loss as a business or personal loss. But this one is just strange and I would appreciate any help. It's her sale of house, not his -- or is it? Per the divorce decree, it's both. I'm thinking I don't report the sale (on his return) and just show the house reverting to personal use? I admit it -- I'm thoroughly confused on this one. It all keeps going in circles. Thanks Quote Link to comment Share on other sites More sharing options...
jainen Posted February 16, 2010 Report Share Posted February 16, 2010 >>if she owns it and is responsible for it, why should he have anything to do with the selling price or proceeds?<< Based on this more complete account, I will upgrade my guess to an assumption. I assume he had no gain or loss because his half of the sale was simply a property settlement pursuant to the divorce decree in which title had been transferred to his former sweetie. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 16, 2010 Author Report Share Posted February 16, 2010 Thanks jainen for all your help. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 16, 2010 Report Share Posted February 16, 2010 If this house is being divided as part of a property settlement in a divorce, would not his basis be the same as half (or his percentage) of their basis immediately before the settlement? And, his percentage of the sale price. And, the usual reporting of a rental of a personal residence with depreciation. It would remain his personal residence if he moved out incident to a divorce and ex continued using it as her personal residence, but since she moved out, do double check all the dates. When I divorced, I had the right to remain in the house for a couple of years as long as I paid all expenses. By a certain date I had to either buy out my ex or split the proceeds of a sale with him (I got 60% of house by giving up his retirement plan) with an elaborate formula re averaging three appraisals (his appraiser, mine, and don't remember how we were to choose the third) for FMV at the time of my buyout or to price the house for sale. Luckily for me, as the time neared, he was in some legal difficulties and needed cash badly, so made me an offer to sign over the house for a specific dollar amount. I quickly hired an appraiser and found his offer was to my favor, managed to refinance in my name only with enough cash out to meet his offer, and got the house in my name totally without all the dates and formulae to deal with. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 16, 2010 Author Report Share Posted February 16, 2010 I'm now thinking I did the whole depreciation thing wrong in the 1st place. Per the divorce, he no longer owned the house. Therefore, no depreciation? I've been taking it for the rental since 2007 on the whole basis. This was after the divorce. The mortgage and property taxes stayed in his name, which they should not have per the decree but he paid since she couldn't (I guess that's why the name didn't change on those documents. Or, her lawyer was quick to change the house but not the liabilities???) But if the divorce said he didn't own the house or the liabilities, why would it have also said that both have to agree to a selling price and that they split the proceeds? In what way is that giving her the house? She moved out that spring (I can check my notes from then for the date -- I needed it then to stop doing her office in home.) Since he had to agree to a price and split the proceeds 50/50, this sounds to me more like he continued to own 1/2 the house. Even though that contradicts another part of the decree. The decree also said that any repairs or expenses related to selling the house would be 50/50. Depreciation at 50% of basis, no depreciation? If there is no gain / loss to him as part of settlement, do I recapture the depreciation I already took (like in a normal sale)? He's not going to be happy if I have to amend 2007 & 2008. And I can't make him file those. I feel like I'm chasing my tail on this one. Thanks! Quote Link to comment Share on other sites More sharing options...
Lion EA Posted February 16, 2010 Report Share Posted February 16, 2010 Are you sure she didn't retain the right to use the house without the ownership changing until they both sold the house? Was he still an owner, just without the right to live there? Don't you hate it when lawyers try to write down things that affect taxes? Quote Link to comment Share on other sites More sharing options...
Kea Posted February 16, 2010 Author Report Share Posted February 16, 2010 The way the lawyers wrote this seems strange to me -- but I'm not a lawyer & they may have had a reason to do what they did. Ex-wife had the right to live in the house, but she moved out anyway. There was nothing about a time frame or need to sell the house. Just when they did sell it, the costs of repairs, etc. would be split 50/50. Same for proceeds. It also said she got ownership, mortgage, property taxes and all other debts relating to the house. Divorce was in April 2007 she moved out in June and he started preparing it for rent in July. House did get re-titled in her name only at some point (don't know when). Quote Link to comment Share on other sites More sharing options...
grandmabee Posted February 17, 2010 Report Share Posted February 17, 2010 it seems strange that the house could get re tittle in her name only when there was a lien on the house. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 17, 2010 Author Report Share Posted February 17, 2010 This whole situation seems strange to me (obviously)! Quote Link to comment Share on other sites More sharing options...
jainen Posted February 17, 2010 Report Share Posted February 17, 2010 >>it seems strange that the house could get re tittle in her name only when there was a lien on the house. << The mortgage is the key to understanding this. Since she could not afford the payments, the bank would not release the lien so she could not get clear title. Nor could she pay her ex for his share, and since neither spouse wanted to live there the plan was obviously to sell the house. Because of market conditions or some other reason, that was delayed while the gentleman was charged with maintaining the property economically, which he had the income for. It kind of sounds like he took advantage of her in this matter, but at any rate she got the house with the agreement that he would get paid later. When the stars finally lined up, they were able to finish their business . Even though it was a few years later, the payoff to him was still only the non-taxable division of marital assets. Quote Link to comment Share on other sites More sharing options...
Kea Posted February 17, 2010 Author Report Share Posted February 17, 2010 I'm still unclear about the depreciation. Did I do it OK? Should I amend to claim no or half basis for depreciation? Do I need to recapture the depreciation I took even if there was no "sale"? Thanks Quote Link to comment Share on other sites More sharing options...
Kea Posted February 18, 2010 Author Report Share Posted February 18, 2010 Bump. Do I need to recapture the depreciation if there was no business sale? Thanks Quote Link to comment Share on other sites More sharing options...
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