Question

As a result of their divorce, Fred agrees to pay alimony to Tammy of $20,000 per year. The payments are to cease in the event of Fred's or Tammy's death or in the event of Tammy's remarriage. In addition, Tammy is to receive their residence, which cost them $100,000 but is worth $140,000.

a. Does the fact that Tammy receives the residence at the time of the divorce mean that there is a reduction in alimony, which will lead to Fred having to recapture an amount in the subsequent year?
b. How will the $20,000 payments be treated by Fred and Tammy?
c. Would recapture of the payments be necessary if payment ceased because of Tammy's remarriage?
d. What is Tammy's basis in the residence?

Answer 1

The receipt of the residence by Tammy does not necessitate the recapture of alimony payments. Fred's alimony payments are deductible and taxable for Tammy, and recapture would not be required upon her remarriage. Tammy's basis in the residence is the original cost of $100,000.

Step-by-step explanation:

Addressing the questions related to Fred and Tammy's divorce financial issues:

a. The fact that Tammy receives the residence as part of the divorce settlement does not necessarily correlate with a reduction in alimony for tax purposes. Alimony recapture rules apply when there is a decrease in alimony payments over time, not due to property settlements such as the residence transfer.

b. The $20,000 annual alimony payments that Fred agrees to pay Tammy will be treated as deductible alimony by Fred and included in Tammy's taxable income, assuming all the requirements for alimony payments are met under tax law.

c. Recapture of alimony payments would not be necessary if payment ceased due to Tammy's remarriage. Recapture is generally triggered by a decrease in payments not related to the contingencies specified in the divorce or separation instrument, such as the death of either party or the remarriage of the recipient.

d. Tammy's basis in the residence is the original cost of the home, which is $100,000. This is because the transfer of property between spouses incident to a divorce is generally a non-recognition event for tax purposes, meaning Tammy assumes the same tax basis that the couple originally had in the home.