CDA Real Estate & Asset Division 2 — Questions and Answers
Question 1: A couple divorces mid-year. For federal tax purposes, what is the treatment of a home sale that qualifies for the Section 121 exclusion?
- Each spouse can exclude up to $250,000 of gain if they each meet ownership and use tests (Correct answer)
- Only the spouse who holds title can claim the exclusion
- The couple must file jointly that year to claim any exclusion
- The exclusion is unavailable once a divorce proceeding begins
Correct answer: Each spouse can exclude up to $250,000 of gain if they each meet ownership and use tests
Under IRC Section 121, each spouse may exclude up to $250,000 of gain on a principal residence sale if they individually satisfy the 2-of-5-year ownership and use requirements.
Question 2: What does a 'lis pendens' recorded against marital real property signal to a potential buyer?
- The property taxes are delinquent
- Litigation is pending that may affect title to the property (Correct answer)
- The property is listed for short sale
- A lien for unpaid HOA fees exists
Correct answer: Litigation is pending that may affect title to the property
A lis pendens is a recorded notice that a lawsuit affecting title or ownership of the property is pending, warning buyers and lenders of the cloud on title.
Question 3: In a divorce, spouse A is awarded the marital home but cannot refinance solely in their name. What risk does spouse B face if left on the mortgage?
- Spouse B loses their right to any equity
- Spouse B remains liable for the debt if spouse A defaults (Correct answer)
- Spouse B must pay capital gains tax on appreciation
- Spouse B must quitclaim the property immediately
Correct answer: Spouse B remains liable for the debt if spouse A defaults
A divorce decree does not release a co-borrower from mortgage liability; if the spouse awarded the home defaults, the lender can still pursue the non-occupying spouse.
Question 4: What is the primary purpose of an Interspousal Transfer Deed in a California divorce?
- To transfer property between spouses without triggering a reassessment for property tax purposes (Correct answer)
- To record the divorce settlement with the county
- To convey community property to a trust
- To establish a lien on the marital home for future support payments
Correct answer: To transfer property between spouses without triggering a reassessment for property tax purposes
An Interspousal Transfer Deed in California conveys real property between spouses and qualifies for a property tax reassessment exclusion under Proposition 19 (formerly Proposition 58).
Question 5: During divorce proceedings, one spouse secretly transfers marital real property to a third party for below-market value. What legal remedy is typically available?
- The court can void the transfer as a fraudulent conveyance (Correct answer)
- The transfer stands because property law governs over family law
- The innocent spouse can only seek monetary damages
- No remedy exists once a deed is recorded
Correct answer: The court can void the transfer as a fraudulent conveyance
Courts can set aside or void transfers of marital property made to defraud a spouse under fraudulent conveyance statutes and equitable distribution principles.
Question 6: When a marital home has negative equity (underwater mortgage), how is this situation typically treated in equitable distribution states?
- The negative equity is ignored because real property cannot be divided at a loss
- The negative equity is treated as marital debt and allocated between spouses (Correct answer)
- Only the spouse on the mortgage bears the entire loss
- The court orders an immediate short sale in all cases
Correct answer: The negative equity is treated as marital debt and allocated between spouses
In equitable distribution states, negative equity is treated as marital debt subject to fair allocation, just as marital debts are divided alongside assets.
Question 7: A divorce settlement grants spouse A the right to occupy the marital home for three years post-divorce before it must be sold. What type of arrangement is this?
- A deferred sale agreement (or 'Watts' arrangement) (Correct answer)
- A life estate grant
- A tenancy in common with right of first refusal
- A sale-leaseback transaction
Correct answer: A deferred sale agreement (or 'Watts' arrangement)
A deferred sale arrangement (sometimes called a Watts charge situation) allows one spouse to remain in the home for a defined period, often to benefit minor children, before requiring a sale.
CDA Real Estate & Asset Division 2
A couple divorces mid-year.
For federal tax purposes, what is the treatment of a home sale that qualifies for the Section 121 exclusion?