Marcia and Dave are separated and negotiating a divorce agreement. They live in a common law state and have two children who will remain with Marcia. Dave is willing to transfer the jointly owned home to Marcia. He wishes to keep the couple's jointly owned boat. Dave will either transfer securities to Marcia ($100,000 adjusted basis, $150,000 fair market value) or will pay her $30,000 for 5 years with interest of 8%. What issues should Marcia and Dave consider when formulating their divorce agreement?
Answer: Marcia and Dave should consider the tax treatment of the transfer of the home to Marcia and the boat to Dave. That is, what are the tax consequences of a property settlement? (No immediate tax consequences; a carryover basis). In considering whether to take the securities or the payments, Marcia needs to consider whether or not the $20,000 per year will be classified as alimony, which is taxable. (It would be deductible for AGI to Dave). Each should consider what determines whether or not a payment is alimonymust be made in cash, must not be specified to "not be alimony," must end with Marcia's death or remarriage, Marcia and Dave can not live together. While the transfer of securities would not trigger immediate tax consequences, if Marcia sold the securities, she would have capital gain which she could offset against any capital losses she might have for the year.