Divorcing couples not subject to capital gains tax on their real estate

In contrast to the rule on transfer tax, just discussed, Federal Law provides that such a transfer of property incident to divorce does not work a gain or loss concerning capital gains tax; hence no stepped-up in basis results.

§ 1041. Transfers of property between spouses or incident to divorce

(a) General rule

No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

Divorcing couples subject to real estate transfer tax on their real estate

Recently, I attended a meeting of divorce attorneys in a group called the Collaborative Lawyers Association of New York (alternative dispute resolution for divorce). At the meeting, our group had mixed feelings if a transfer of real property between spouses at divorce was for no consideration (no tax) or for fair market value (tax). Ethically, the attorneys agreed that this matter required further research.

As it turns out there is a taxable event according to the New York Code of Rules and Regulations.

20 NYCRR 575.11(a)(10): A conveyance from one spouse to the other pursuant to the terms fo a divorce or separation agreement is subject to tax. (There is a rebuttable presumption in such case, that the consideration for the conveyance, which includes the relinquishment of marital rights, is equal to the fair market value of the interest in the real property conveyed.).

The takeaway is that even though you and your spouse own a piece of property already, when you transfer it to each other as part of a divorce settlement, you will be taxed or you are committing tax fraud.

BE WARNED.

Dual Agent with Designated Sales Agent - Who is the Dual Agent?

The benefits of being a teaching law firm is that we get to learn from students in their respective industries what issues they are actually having in practice before we litigate disputes.

The question I got today was this: Who is the third person in a real estate deal with a dual agent with designated sales agent? Do we have to split our commission with this third person? I just don't get it. Must we pick another person in the office to serve as this third person.

Lets be clear - the third person is technically the broker of record at your office, but no there is not another agent involved in the transaction nor do you have to further split your commission. Instead, the theory of a dual agent with designated sales agent is this:

• Both agents (listing & buyers) work for the same company
• At the company (brokerage house) there is a boss (broker of record)
• Both agents (listing & buyers) have to report to the boss if the boss so requires
• While reporting to the boss confidences of the seller or buyer may be required to be shared
• The seller and buyer should know this limitation on their confidences before retaining the agents and either consent to it or not permit a dual agent with designated sales agent representation

If you have any more questions on this topic I suggest attending our next Conflicts of Interest class where this topic is discussed in more detail.

Estate Gift Tax Rates to Change

The President's 2012 budget, released in mid-February seeks to return the Federal Gift tax exemption to $3.5 million, which was temporarily increased to $5 million, and the gift and generation skipping to $1 million, with a 45% transfer tax rate. The senate is divided. Republicans would like to remove the estate tax all together, while both would agree on $5 million exemption, however disagreeing on the tax rate (45% or 35%).

Further, it seeks to make portability permanent, meaning, a spouse can use their spouse's unused exemption permanently, whereas now it is set within specific time limits.

Also sought is a 10 year minimum and remainder value greater than zero for grantor retained annuity trusts (GRAT). GRATs allow transfer of wealth between family members at a reduced gift tax cost if the grantor survives the term. Dynasty trusts will also be limited (used in jurisdictions that do not follow the common law rule against perpetuities) with a 90 year maximum on new trusts or new monies to existing trusts.

Additionally, the new budget seeks restrictions by way of a new class of tax restrictions on valuation discounts which allow discounts in the valuation of family owned businesses.

Look out for changes nearing 2012.

Anti-Deficiency in Short Sales: California

On July 15, 2011, a new law was enacted in California which prohibits deficiency judgments in short sale transactions. Short sale transactions are sales by homeowners to third parties, requiring lender approval, for less than the amount of the loan.

This applies to all 1-4 unit residential mortgages, whether first or later, and to borrowers as individuals, partnerships, LLCs, or corporations.

Originally, a law was enacted which prohibited deficiency judgments, but applied only to first residential mortgages by individuals.

This law may affect the bargaining position of homeowners with lenders regarding short sales, as it becomes a less attractive option for a lender where they are unable to get a deficiency judgment for the remaining amount of the loan. Many times lenders do waive this right, however, taking it off the table from the outset may be damaging to a homeowner's ability to procure the same, and further limits their options in foreclosure.

Although this law has not yet been enacted in NYS, California's enaction of the same, as well as the current state of the market and housing may appeal to NYS legislators and therefore it is something to keep an eye on into the future.