Basis In Property

One of the most often missed topics in divorce planning is basis. Whether we’re talking about the house, stocks or other real estate, knowing the basis is a must when taking on the task of separating property. Consider the following case study.

Kris and Brian have been married for 18 years. They have no children. They have decided everything except how to divide the remaining three assets equally. Those assets are a cottage in Hawaii worth $350,000, an IRA worth $150,000 and a savings account worth $250,000. The $250,000 in the savings account represents a loan taken against the cottage in Hawaii.

Brian proposed to Kris that she take the cottage and sell it. She would net $100,000. And she should also take the IRA worth $150,000. He would take the savings account and they would each end up with $250,000.

His proposal looked like this:

 

Assets                 Kris                         Brian

Cottage       350,000

– 250,000

100,000              100,000

IRA                  150,000              150,000

Savings       250,000                                   250,000

Total       $500,000              $250,000                $250,000

 

Kris considered this option and ultimately decided it sounded fair. The problem was Kris didn’t consider the basis. Had she been advised to gather and analyze basis information, she would have discovered that Brian had paid $90,000 for the cottage 15 years earlier. It was sold at an incredible estate sale. There was a $260,000 capital gain, which created a tax of $52,000 (capital gains tax at 15% plus state tax at 5%). Kris received $100,000 and had to pay out $52,000, so she had only $48,000 left.

 

Capital gain                     260,000

 

Federal tax (15%)                 39,000

State tax (5%)                        13,000

Total capital gains tax                 $52,000

 

The after-tax value of the IRA is approximately $100,000 (not counting penalties as she is not planning to liquidate it immediately), so Kris ends up with $148,000. The $250,000 that Brian borrowed from the cabin and put in the savings account was his, tax-free.

 

Assets                 Kris                              Brian

Cottage          48,000              48,000

IRA                    100,000              100,000

Savings                                                          250,000

Total                              $148,000              $250,000

 

He ends up with $250,000 and she ends up with $148,000, because the question was not asked about the basis. Be sure to investigate the basis in all assets. Then there will be no surprises.