Abstract
The custody of the children having been determined, the next question to be decided is that of the disposition of the parties’ marital residence. Whether a one-family house, a condominium, or a cooperative apartment, the marital residence, if owned by the parties—which will generally be the case—can be one of the most difficult issues for the couple to resolve, since their home also represents their single largest asset.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Notes
Although it is not generally appreciated, and rarely taken into consideration by the court in determining whether the custodial parent will be given the right to continue to live in the parties’ marital residence, there are some potentially severe tax consequences for the party who will be vacating the marital residence prior to its ultimate sale. To begin with, and since it will not be his principal residence at the time of the sale, he will not be able to defer the taxes due on any gain realized as a result of the sale, by investing the proceeds that he will receive in a new principal residence. I.R.C. ∫ 1034 (West 1988 Supp.). For the same reason, and since a portion of those proceeds will now have to go for income taxes, the amount that will be available to him to invest in a new principle residence will be reduced by that amount. Secondly, if the home is sold more than two years from the date that he vacates it, then, and if he is 55 years of age at the time of its sale, he will lose the benefit of the lifetime exclusion of ∫125,000 accorded to him by section 121 of the Internal Revenue Code, at least with respect to the profit derived from this residence. This will be discussed further in Chapter 22, Income Taxes.
In 1973, for example, the median price of an existing home was approximately $28,900. By 1984 it had risen to $72,300. In the same period, however, median family income, in constant dollars, dropped by more than $1,700. Translated in terms of spending power, this meant that whereas a median income family could afford a house priced $4,130 higher than the median price of an existing home in 1973, the same family was $28,236 dollars short of the amount that they needed in 1984. Michele Ingrassia, Housing: Great Expectations are Falling Short, Newsday, Part 2, June 2, 1976, at 3. Put another way, in 1973 the average 30-year-old male would have had to pay only 21% of his income for a mortgage on a median-priced home. In 1984 he would have had to pay 44% of his income for the mortgage on the same home. This is not to suggest that the average person is actually paying 44% of his income for that purpose, but simply that he would have to were he to buy the home. The answer, of course, is that he cannot afford to do so. Philip Longman, The Mortgage Generation: Why the Young Cant Afford a House, The Washington Monthly, April 1986, at 11. Part of the problem stems from the incredible increase in home prices in the last 30 years. Between 1955 and 1985, the increase in the cost of a median priced new home represented a real increase of more than 60 percent. Id. The other factor that accounted for the greater cost is the increase in the cost of financing the home. Thus, for example, a conventional first mortgage loan for the purchase of a single-family new home rose from 8.3% in 1970 to a high of 14.5% in 1982 before reducing to 11.9% in 1984. U.S. Bureau of the Census, Statistical Abstract of the United States: 1986 (106th ed.), at 738. Finally, there were the record increases in the cost of fuel, which represented the largest increase in consumer goods since 1967 except for medical care services. Thus, the consumer price index for all urban consumers increased from $100 in 1967 to $469.20 by July of 1986. U.S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report, (Washington D.C. July 1986), at 8.
The problem that increased housing costs pose for the wife can be illustrated as follows: if the husband is the sole wage earner, if between 20 and 25% of his income has gone to pay for housing, and if, by their agreement, his wife is to receive half of his income for herself and their children, she will be required to spend between 40 and 50% of her income for housing. Suppose, instead, that the husband had been required to pay between 30 and 35% of his income for that purpose. Since these are largely fixed expenses over which the wife has no control, if she continues to live in the home she will now be required to spend between 60 and 70% of her income to meet those costs.
While this is still significant under the Tax Reform Act of 1986, it is less significant than it previously was. Under prior law, for a taxpayer in the 50% bracket, a deduction of $1 meant a savings of 50¢. With a maximum tax of 33%, that savings is now only 33¢. To put it another way, while, under previous law, a mortgage interest payment of $100 only costs this taxpayer $50, under the new law it will cost him $67.
This, of course, has all been changed by the Tax Reform Act of 1986, which now treats the profits on the home (the income received from its capital appreciation) as ordinary income. I.R.C. ∫ l(j) (West 1988 Supp.).
I.R.C. ∫ 121 (West 1988 Supp.). This has not been changed by the Tax Reform Act of 1986. In that respect, the parties’ investment in their home still represents sound financial planning from a tax standpoint.
Normally, if the husband and the wife were to sell their home to a third party, they would each be required to report one-half of the gain on their individual income tax returns (or the full gain on their joint return, if they are still married on December 31st of the year in question and file a joint return) and to pay the taxes on the gain so reported. If either of them should sell his interest in the home to the other, however, the situation may be very different, and the party purchasing the other’s interest may be responsible for the entire tax, and the party whose interest is purchased, responsible for none of it. I.R.C. ∫ 1041 (West 1988 Supp.). This will be discussed at greater length in Chapter 22, Income Taxes, starting at page 417.
See, e. g., Diez-Arguelles v. Commissioner, 1984 T.C.M. 356 (C.C.H.); Finney v. Commissioner, 1976 T.C.M. 329(C.C.H.).
Again, he may deduct the full amount of the mortgage interest payments and taxes if the parties stipulate in their agreement that the payments the husband will make to the wife will be applied by her to make those payments.
Rights and permissions
Copyright information
© 1990 Springer Science+Business Media New York
About this chapter
Cite this chapter
Marlow, L., Sauber, S.R. (1990). Marital Residence. In: The Handbook of Divorce Mediation. Springer, Boston, MA. https://doi.org/10.1007/978-1-4899-2495-7_15
Download citation
DOI: https://doi.org/10.1007/978-1-4899-2495-7_15
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4899-2497-1
Online ISBN: 978-1-4899-2495-7
eBook Packages: Springer Book Archive