Question

Neal and Ella were divorced. Their only marital property was a personal residence with a value of $100,000 and cost of $40,000. Under the terms of the divorce agreement, Ella would receive the house and she would pay Neal $10,000 each year for five years, or until Neal's death, whichever should occur first. Neal and Ella lived apart when the payments were made to Neal. The divorce agreement did not contain the word "alimony." Which of the following statements is true?

a.Ella is allowed to deduct $10,000 each year for alimony paid.
b.Neal must recognize a $30,000 [$50,000 - 1/2($40,000)] gain on the sale of his interest in the house.
c.Neal does not recognize any income from the above transactions.
d.Ella is not allowed any alimony deductions.
e.Neither Neil nor Ella must recognize income or gain, and neither can deduct for alimony payments.

Answer 1

Neal must recognize a $30,000 gain on the sale of his interest in the house.

Step-by-step explanation:

The correct statement is:

b. Neal must recognize a $30,000 [$50,000 - 1/2($40,000)] gain on the sale of his interest in the house.

Under the divorce agreement, Ella receives the house and makes annual payments to Neal. This means that Neal is transferring his interest in the house to Ella. Since Neal's basis in the house is $40,000, and the value of his interest in the house is $50,000, he must recognize a gain of $10,000 ($50,000 - $40,000) on the transfer.