income tax on cabin during divorce -

QUESTION:

I am currently in the process of divorcing my wife.  I jointly, with my wife and my 2 siblings and their spouses, own a cabin and recreation property in the interior, which has increased in value approximately $350,000 over 8 years.  We (all the owners) are in the process of selling this property.  My question is;  If I 'trade off' my interest in our family home to my wife for her portion of the recreation propery, can I claim the recreation property as my principle residence to avoid paying capital gains? 
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david ingram replies:

The question does not match the female email address but that does not matter for the answer.

It does, however, remind me of the old story of the fellow who walks into his lawyer's office and explains a case he wants to sue over and the lawyer looks pleased and says 

"you have a win there Rick!

Rick looks disappointed and gets up to walk out and the lawyer asks him why he does not appear happy. 

Rick says, "I told you the other sides's case".

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The answer to your question is that either your 1/6 share of the cabin or your 1/2 share of the family house can be tax free for both your spouse and yourself at the same time.  If you trade off the house for the cabin and the two of you elect to make the house tax free,  your share of the cabin can be tax free from the date of the trade-off but everything for you AND your spouse up to that date is taxable.  I am assuming here that the family home went up more than your share of the cabin.

When making the trade with your spouse, the lawyers should take your tax liability into account when figuring the trading dollar amount.

As an example, I want to assume that 'miraculously', you and your spouse were the owners of a $600,000 family home and a $600,000 ski cabin at Whistler.

Co-incidently, you had paid $200,000 for both properties and had never rented either unit out and they are both paid for.

.Family lawyers in this case, regularly trade off the house for the chalet and it seems even because you both end up with a $600,000 piece of real estate.

However, the tax situation looks like this.

If, in the divorce, you take over the ski chalet at your spouse's acb ($100,000) you now own a piece of property which has a taxable $400,000 capital gain inthe future -  If you were to sell it the next day, you would owe from $70 to 88,000 while your spouse would owe nothing if they sold the family home the next day.

There is a solution. 

As a person, you can elect to consider either your share of the chalet or the family home to be tax free and so can your spouse.

Therefore, your spouse should consider their share of the chaplet to be youir spouse's tax free piece of property up to the date of separation or divorce and you should consider your share of the family home to be your tax free residence.  That way, your spouse would transfer their share of the chalet to you at $300,000 instead of the elective original ACB of $100,000.

You would do the same thing with your spouse and transfer your share of the family house to your spouse at $300,000 rather than the elective $100,000.

That leaves your spouse with the future responsibility of paying tax on thier $200,000 share of the profit on the family home in the future ($300,000 - $100,000).  The nice part here is that if your spouse stays in the house for 20 years, they does not have to pay the $35,000 or so tax. 

The same is true of you.  You do not have to pay tax on the $200,000 of profit in the ski chalet until you actually sell it.  Because any future profits are tax free, the amount of tax is frozen and as you will agree, paying $30,000 tax 10 or 25 years from now will be like paying $15,000 or $5,000 today, depending upon inflation.

Now that was mainly a political statement.  It does not apply as much in your case because 'your' cabin is about to be sold soon and the present value of a dollar will not be much of a factor. I also bet that you more likely have a $1,000,000+ house and a $250,000- equity in the cabin to deal with.  In your case, the tax liability should be calculated and an adjustment made in the settlement.

Good luck, I am living in a house that I jokingly say I have bought 4 times.  Once for $42,000, once for $56,000, once for $160,000 and the last time for $641,000.  Divorce is expensive.

When you bring this up with the divorce lawyers, I can almost guarantee they will scratch their heads. In the 35 1/2  years that capital gains problems have been in effect, I have never once met a divorce lawyer who understood it on first look.

Judge Flannigan said it best 20 years ago back in the 80's.  I can not find the quote but it went something like this.

"With all due respect I do not think my colleagues on the bench understand the tax ramifications of divorce.  I think further with all due respect that there are a great many competent atorneys who draw up divorce agreements with little or no thought given to the tax consequences thereon." 

I may be out a word or three but the thought is exactly what he said and meant.
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David Ingram wrote:
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It is very unlikely that blind or unexpected email to me will be answered.  I receive anywhere from 100 to 700  unsolicited emails a day and usually answer anywhere from 2 to 20 if they are not from existing clients.  Existing clients are advised to put their 'name and PAYING CUSTOMER' in the subject and get answered first.  I also refuse to be a slave to email and do not look at it every day and have never ever looked at it when i am out of town. 

However, I regularly search for the words"PAYING CUSTOMER" and always answer them first if they did not get spammed out. As an example, as I write this on June 28th, since June 16th (12 days), my 'spammed out' box has 7,118 unread messages, my deleted box has 2630 I have actually looked at and deleted and I have answerd 63 email questions I have answered for clients and strangers.  I have also put aside 446 messages that I am maybe going to try and answer because they look interesting.

Therefore, if an email is not answered in 24 to 36 hours, it is lost in space.  You can try and resend it but if important, you will have to phone to make an appointment.  Gillian Bryan generally accepts appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321

David Ingram's US / Canada Services
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Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
 
David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada.
 
This is not intended to be definitive but in general I am quoting $800 to $2,800 for a dual country tax return.
 
$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,000 would be the same with one rental
 
$1,200 would be the same with one business no rental
 
$1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,600 would be for two people with income from two countries

$2,800 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $150.00 up.
 
With a Rental for $350
 
A Business for $350 - Rental and business likely $450
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.
 
Just a guideline not etched in stone. 
 
This from "ask an income trusts tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily basis with expatriate tax returns with multi jurisdictional cross and trans border expatriate problems  for the United States, Canada, Mexico, Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand, Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia, Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida, Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali, Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent, Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland, Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax  Immigration Wizard Antarctica Rwanda Guru  Consultant Specialist Section 216(4) 216(1) NR6 NR-6 NR 6 Non-Resident Real Estate tax specialist expert preparer expatriate anti money laundering money seasoning FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income Tax Convention

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