Income-tax tidbits your divorcing clients should consider

• Most sellers won’t need to worry about paying taxes on the gain from the sale of their main residence. For married couples who owned and used the property as a primary residence for two out of the five years prior to the sale, the first $500,000 of gain (not selling price) is tax-free; for singles, the first $250,000 is tax-free. If the selling couple divorces during or before the year-of-sale, the $500,000 tax-break becomes two $250,000 tax breaks.
• Contrary to what most people believe, homeownership will not always lower a buyer’s income taxes compared to renting a home. Homeownership gives a tax break only if the buyer can itemize, which allows a deduction for mortgage interest and property taxes. If a buyer is looking at a low-end home in a low-interest-rate environment, it is possible that the standard deduction could be larger than itemized deductions, hence no tax break. The tax situation could be important for the lower-income-earning ex-spouse when choosing to rent or buy.  For mid- and upper-end homes, however, homeownership almost always will lower income taxes. 
• When a divorcing couple owns rental property, the divorcing individuals can be caught in a tax-return cash crunch. In Texas, until a divorce is final, a couple must report rental-property net income 50-50 on their income-tax returns.  Example: Jean and Tom, who are divorcing, own rental property. The net income on the property is $12,000 in 2003. Their divorce is final on Dec. 31, 2003, so they will file as single individuals. Jean and Tom will each report $6,000 of net taxable income from the rental property. But Tom let Jean have the rental property bank account with the $12,000 in it. Now Tom needs to come up with the cash to pay the income taxes on his $6,000 of net income.
• Suggest that your client consult a tax expert when making real estate decisions in a divorce situation. While no gain or loss is recognized on property transferred between spouses incident to divorce, there are other income tax "gotchas" your client will want to avoid.

– Debbie Webb, MS, CPA, of Thompson, Derrig & Craig in College Station/Bryan

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