Divorce and Property: Both Are Taxing Issues

Q: In a divorce, how is the income tax basis of the couple’s home handled if one spouse keeps the house and the other spouse is cashed out of his equity?

What happens to the property tax assessment of the house if the selling spouse is cashed out at a far higher value than what the house is assessed?

Is the spouse who stays in the house subject to an increase in property taxes just for continuing to live there? --M.B.

A: A divorce does not change the income tax basis or the property tax assessment of a couple’s home in any way.

If one spouse keeps the house as part of the property settlement, the value assigned to the half of the house given up by the other spouse is irrelevant to the home’s actual tax basis. So, if your house has a $100,000 tax basis and a $500,000 market value, the $250,000 value presumably assigned to each spouse matters only to the property settlement process. The spouse keeping the house keeps the original $100,000 tax basis as well.

So, if the spouse keeping the home were to sell it for $500,000, he or she would face an income tax bill on as much as $400,000 of the proceeds.

This is why attorneys and accounts who routinely handle property settlements urge divorcing couples to assign equally not only the marriage’s assets but the cost bases of those assets.

As you can see, it does a spouse no good to receive an asset worth several hundred thousand dollars if virtually all of it is taxable upon sale.

Under California law, transfers of property between spouses are excluded from reappraisal for property tax purposes regardless of the value assigned to the real estate in a divorce settlement.

Explore Options Before Buying a Second Home

Q: Our home currently does not have a mortgage on it. But we are thinking of mortgaging it and using the proceeds to purchase a second home in the Palm Springs area. Will the interest on the mortgage be deductible? We were told that it would not be. --E.B.

A: Your interest payments will be deductible because the proceeds of the mortgage are being used to purchase a second home--an allowable mortgage interest deduction. Anyway, homeowners are allowed to increase the mortgages on their primary residence by up to $100,000 and use the proceeds for anything they want and still deduct the interest.

Even though your plan gives you an interest deduction for your income taxes, are you sure this is the course you want to pursue?

Why not get a mortgage on your vacation home? Although a mortgage on a primary residence may carry a slightly lower interest rate, our experts believe that a second home loan is the cleaner and simpler way to handle your situation because it limits your exposure to potential problems should ever fall behind in your payments. By refinancing your current home, you expose yourself to the potential that all your assets could be tapped if you default on the loan. However, a “money purchase mortgage,” the type you get when you buy a home, limits your exposure in the event of default to just the asset being purchased with that mortgage.

Deadline Nears for German Expatriates

Q: I thought I read somewhere about a way for former residents of Germany to reclaim property confiscated by either the former East German Communist regime or Nazi authorities. Has the deadline for claiming property already passed? --S.H. A: The deadline for reclaiming assets that were either confiscated or left behind due to political changes in Germany after April 1, 1933, is fast approaching. The final date to file a claim is Dec. 31.

Claims should be filed with the Amt Fur Vermogensfragen, a government agency handling these matters, in the town in which the assets are now held. The reparation program was initially aimed at residents of former East Germany whose property was confiscated by the Communists. The program was later expanded to included Germans forced to flee Germany to escape the Nazi regime. Assets subject to these claims include real estate as well as ownership in business.

The German Consulate has prepared a free pamphlet outlining the program. For a copy, send a self-addressed, stamped envelop to the German Consulate, 6222 Wilshire Blvd., Suite 500, Los Angeles, Calif., 90048.

Bad Credit Information Has a Life of Its Own

Q: How long does negative information stay in your credit report? --J.S.

A: It depends on how negative the information is. Credit bureaus are entitled to list personal bankruptcy filings for up to 10 years after the court’s disposition of the case. However, some credit bureaus will erase mention of bankruptcy after seven years if a consumer has repaid all or some of his debts under a Chapter 13 personal bankruptcy.

Less serious credit problems, ranging from missing a monthly credit card payment to losing a property to foreclosure, can remain on your report for up to seven years. However, a bill pending in Congress would reduce the time some minor credit problems could be listed on reports to less than seven years.