Basis in Property is Important

After being involved with numerous divorce cases we find that many attorneys overlook cost basis. Whether it refers to the house, or stocks, other real estate, or other investments, basis is important.  Consider the following case study:

Melanie and Mac have been married for 18 years.  They have decided to divide their three assets equally.  Those assets are an investment cottage in Hawaii worth $350,000, with a $250,000 mortgage, an IRA worth $150,000 and a savings account worth $250,000.

 Mac proposed to Melanie that she take the cottage and sell it. She would net $100,000. And she should also take the IRA worth $150,000. He would take the savings account, and they would each end up with $250,000.

His proposal looked like this:

                    Assets                                        Melanie        Mac

Cottage     $350,000

                   - 250,000

                     100,000                                   100,000

IRA              150,000                                  150,000

Savings       250,000                                                       $250,000

Total           $500,000                                 $250,000     $250,000

 This looks fair, but if Melanie’s attorney had asked, she would have learned that Mac had paid $90,000 for the cottage 15 years earlier. Thus, there is a $260,000 capital gain causing a tax of $39,000. Melanie would receive $100,000 and have to pay out $39,000, so she would have only $61,000 left. 

The after-tax value of the IRA is approximately $100,000, so Melanie ends up with $161,000. The $250,000 that Mac borrowed from the cabin and put in the savings account was his, tax-free and clear. 

 Be sure to investigate the basis in all assets. Then there will be no surprises.