Question

Mike and Karen were divorced. Their only marital property was a personal residence with a fair market value of $1.5 million and a cost of $575,000. Under the terms of the divorce agreement, Mike would receive the house and Mike would pay Karen $150,000 each year for 5 years, or until Karen's death, whichever should occur first. Mike and Karen were not living together when the payments were made by Mike. Mike paid the $750,000 to Karen over the five-year period. Mike's recognized gain from the transfer of the house to him is:

Answer 1

Mike's recognized gain from the transfer of the house to him is:

$175,000

Step-by-step explanation:

a) Data and Calculations:

Marital property = $1,500,000

Cost of property = $575,000

Residual value = $925,000

Alimony to Karen = $750,000 ($150,000 * 5)

Balance (Mike's) = $175,000

$175,000 represents the excess of the fair market value of the marital property after deducting the cost of property and the alimony paid to Karen. A gain of $175,000 is recognized by Mike after the property sale.