Question

Alicia and Rafel are in the process of negotiating a divorce agreement. They both worked during the marriage and contributed an equal amount to the marital assets. They own a home with a fair market value of $400,000 (cost of $300,000) that is subject to a mortgage for $250,000. They have lived in the home for 12 years. They also have investment assets with a cost of $160,000 and a fair market value of $410,000. Thus, the net worth of the couple is $560,000 ($400,000 − $250,000 + $410,000).

The holding period for the investments is longer than one year. Alicia would like to continue to live in the house. Therefore, she has proposed that she receive the residence subject to the mortgage, a net value of $150,000. In addition, she would receive $17,600 each year for the next 10 years, which has a present value (at 6% interest) of $130,000. Rafel would receive the investment assets. If Rafel accepts this plan, he must sell one-half of the investments so that he can purchase a home. Assume that you are counseling Alicia.

Answer the following to explain whether the proposed agreement would be "fair" on an after-tax basis.

a. Alicia would receive a before-tax amount equal to $.X

b. Rafel would receive a before-tax amount equal to $X. The $17,600 Rafel pays Alicia is considered (Alimony, part of the property settlement) and, therefore, (would, would not) be deductible by Rafel.

c. Rafel's basis in the investment assets he receives will be $X. Therefore, if the investments were sold for their current value, Rafel would have a $X (taxable gain, deductible loss) .

Answer 1