some property transfers aren't taxable
Posted on April 3, 2016
Some property transfers aren’t taxable (Part 4 of 5)
Our 30-year marriage is at an end. The questions are:
Should I file for divorce in Massachusetts or in
England? Should I stop working and let the Executive VP
take over the company?
Q. I’m a citizen of England. Before I got married, I acquired a substantial amount of property through both my hard work and inheritance. I married an American woman. We jointly own a home on Nantucket in which we now live about half the year. We have other assets in the USA. The other half the year we live in the U.K.
A. If you’d be paying alimony out of your savings or other capital accounts, you’d want- and the Internal Revenue Code permits you- to pay your U.S. citizen-wife alimony which is not taxable to her. That she does not have to pay tax on the money received should reduce your out-of-pocket. Surely your wife would agree because she would be better able to know exactly what she had to spend.
The IRC also provides that transfers of property before, at, or in connection with a divorce are not taxable events. The transferee must take the transferor’s basis in the property. So let us assume you bought a building for $10 million, which has a current basis of $8 million, which is now worth $27 million. If you had to transfer that building to your wife as part of the division of marital assets, her basis on the building would be $8 million. You’d probably also have to transfer to her any unused depreciation, known as a loss carry-forward, which in turn would increase her basis in the building. s suppose this building is located in the U.K., not in the U.S. Because you’ve lived in the U.S. for more than 31 days in the current year, and at least 183 days over the current and last two years, you pass the IRC’s “Substantial Presence Test”. And, if you also had a so-called Green card, for tax purposes you’d be treated by the IRS like the rest of us U.S. citizens. That means if you sell a building you’d have to pay capital gains taxes. But if you transfer that building to your wife who lives in the U.K., she might not pay the U.S. tax and that could leave you holding that bag. Therefore, you need to have your international tax lawyer carefully read the tax treaties between the U.S. and the U.K., which may let you off the hook. If not, you should ensure she’ll pay the potential U.S. tax by holding back other money or assets. Either way that means you must pay taxes here on your worldwide income.
Next week I’ll sum up by providing a suggested road map.
But, if the information in this and last three columns
hasn’t convinced you to stay married, then be assured
that, so far, you’ve only seen the tip of the iceberg.