Real Estate & Asset Division Flashcards

A divorcing couple owns a rental property with accumulated depreciation. What tax issue must the receiving spouse be aware of regarding future sale?

Answer: Depreciation recapture at ordinary income rates (up to 25%) will apply when the property is sold

The receiving spouse inherits the transferor's adjusted basis including depreciation, and upon a future sale, depreciation recapture under IRC Section 1250 is taxed at up to 25%.

Both spouses are on the deed to the marital home but only one is on the mortgage. At divorce, the non-mortgage spouse quitclaims to the other. What risk remains for the non-mortgage spouse?

Answer: No risk — the non-mortgage spouse was never liable for the debt

A spouse on the deed but not the promissory note is generally not personally liable for the mortgage debt; quitclaiming simply relinquishes their ownership interest without creating new financial risk.

What is a 'short sale' in the context of a divorcing couple's underwater home, and what tax consequence may result?

Answer: Sale of the home for less than the mortgage balance with lender approval; forgiven debt may be taxable income

In a short sale, the lender accepts less than owed and may issue a 1099-C for forgiven debt, which the IRS can treat as ordinary income unless an exclusion applies.

A couple divorces and the settlement requires spouse B to receive a cash payment equal to half the home's equity instead of the home itself. This approach is best described as:

Answer: A lump-sum equalization payment offset against another asset

An equalization payment allows one spouse to keep an asset (the home) while compensating the other in cash or offsetting assets of equivalent value, balancing the overall property settlement.

What is the significance of a 'hold harmless' clause in a divorce settlement regarding a jointly held mortgage?

Answer: The spouse assigned the debt agrees to pay it and indemnify the other spouse from any liability arising from it

A hold harmless (indemnification) clause requires the spouse responsible for the debt to cover the other spouse if the lender pursues them, though it does not change the lender's legal rights.

Which of the following best describes the 'offset method' of dividing marital real estate?

Answer: One spouse keeps the home while the other receives assets of equivalent value from the marital estate

The offset method lets one spouse retain the home in exchange for the other spouse receiving other marital assets (retirement accounts, investments, cash) of comparable value.

A couple purchased a home in a community property state. Only spouse A worked; spouse B stayed home. How is the home classified at divorce?

Answer: Community property because wages earned during marriage are community property in those states

In community property states, wages and income earned by either spouse during marriage are community property, so a home purchased with those earnings is jointly owned regardless of who worked.