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DAVID ELLIS _ Divorce And Dividing Property

(Part 12 is continuation of series, links to all parts are provided at end of this blog post. This valuable series on Dividing Property In Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)

D. Dividing Interest in S Corporations and Other Pass-Through Entities

A large percentage of closely held businesses are organized as “pass-through entities”. This means that the income, loss, special deductions, and the like are reported on the individual tax return of the entities’ owner rather than the businesses themselves. Common forms of pass-through entities that need to be allocated between spouses in a divorce situation include S Corporations, LLCs, and Partnerships. Trust and estates, typically being separate property bequest, would not generally be expected to cause separate property issues.

The division of interest in pass-through entities, is subject to the general rules of IRC Section 1041 (nonrecognition of gain/loss, carryover of basis, etc.). However, ownership of pass-through entities—especially in the form of a closely held business, can be a double edge sword. Issues that should be taken into consideration, include but are not necessarily limited to the following:

Written by David Ellis | Posted in Dividing Property In A Divorce Tax Traps

Tax Aspects Of Dividing Property In A Divorce (Series – Part 3

(This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)

III. Section 1041 Specifics as to Type of Property

1. The Marital Residence

Perhaps the most common property division issue the practitioner will face when a couple divorces will be the division of the marital home. Often, which spouse, if any, will end up with the home will be the central issue in the property settlement.

Furthermore, non-monetary issues such as emotional attachments, or the preferred school district for couples who have children, frequently complicate matters.

Given the above, it is imperative that the practitioner be thoroughly familiar with the tax ramifications of dividing the residence.

A qualifying single taxpayer can exclude up to $250,000 of gain on sale of principle Qualifying married couples filing jointly can exclude up to $500,000.[1]
1. Taxpayer must have maintained the home as his/her principal residence for two out of the last five years.[2]
2. Taxpayer must have owned the residence for two out of last five years
3. Only one sale every two years qualifies for the exclusion. Taxpayer must not have used the exclusion during the previous two-year period before the current sale.[3]

Tax Trap Alert: Practitioners should familiarize themselves with the major exceptions and special cases IRC Section 121 and the related regulations and rulings address, including but not limited to the following: