Post-Divorce Finances Can Be Complex Issue

QUESTION: Can you help? I am a 45-year-old mother of an 11-year-old boy and am in the midst of a fairly amicable divorce. My problem is that my soon-to-be “ex” has handled all of the finances during our 12-year marriage. Until my lawyer told me to collect all my financial information, I didn’t even know what our monthly mortgage payment was! Now that I will be on my own, I am going to need help handling my half of our combined assets, an amount that could be in excess of $500,000. Where do I turn?--M. F. R.

ANSWER: You are wise to realize that you need help. Getting a divorce, the experts tell us, is more than severing the emotional ties of marriage. You are also dissolving an economic partnership, and it only stands to reason that you should want as much help dealing with that aspect of the divorce as you do the legal and emotional issues.

You might ask your attorney for the name of a financial planner or accountant who specializes in the economic issues surrounding divorce. Several Southern California attorneys and accountants we consulted said they recommend Libby Agren, a Los Angeles investment adviser who regularly holds day-long seminars on this subject. The seminars cost $90. Agren has also prepared a $60 handbook and cassette tape package covering the same material.

Another source of referrals is the CPA Society of Financial Planners, an industry group that keeps a listing of its members according to the specialized services they offer. The society makes referrals to members throughout California at no charge to the calling party. The number is (800) 445-7426; ask for John C. Bish. By the way, all members of the society charge an hourly fee for their services and do not sell financial investments.

For a less expensive alternative, check the books available in your local library or bookstore. A couple of possibilities are “The Divorce Handbook” by James T. Friedman and “Women and Money” by Mary Rogers and Nancy Joyce. Both books are currently in print. Out-of-print titles that might still be available in libraries include “Women, Divorce and Money” by Mary Rogers and “Everything You’ve Wanted to Know about Your Husband’s Money . . . and Need to Know Before the Divorce” by Shelley Aspaklaria and Gerson Geltner.

Also, don’t forget the Internal Revenue Service. The IRS offers, at no cost, Publication 504, “Tax Information for Divorced or Separated Individuals.”

Q: I am a 40-year-old consultant thinking of leaving the Southern California area to open a business in another part of the country. Until I get my new career fully in gear, I don’t want a heavy mortgage hanging over my head. What are the tax implications of selling my existing house, which is probably worth $450,000, and buying one for about $200,000? I paid $300,000 for my current house and have deferred payment of taxes on the gains I made from the sales of two other houses I owned in the past. What does the tax man have in store for me?--A. F. R.

A: Plenty.

Although you haven’t told us absolutely everything we need to know, we can still help. The important figure in the equation is the “tax basis” of your current house--not its purchase price. The tax basis is computed by adjusting the $300,000 purchase price of the house you currently own in two ways: adding the cost of any permanent improvements you have made to the house, and subtracting any gains you have deferred on the sales of your two previous homes. For the sake of this example, we’ll assume that you have a $70,000 basis.

Now, there are two computations you must make to evaluate your tax standing on your proposed transaction. First subtract your tax basis from the sale price of your house. In your example, it would be $450,000 minus $70,000. The $380,000 difference is what the Internal Revenue Service calls your “realized gain.” Now, subtract the projected purchase price of your new home, $200,000, from the sales price of your existing one, $450,000. The $250,000 difference is what the IRS calls your “recognized gain.”

Here’s what the IRS says. You will be liable for taxes on the lesser of the realized or recognized gain. In your case, you would be responsible for taxes on the $250,000 recognized gain. By the way, the gain is taxed as ordinary income, and under current laws, the federal rate would be 28% and the California rate would be 9.2%, for a total tax bite of 37.2%. Your total tax payments on the transaction would be about $93,000!

If your head has stopped spinning and you have calmed down, there’s more to be said. If you decide to go ahead with your “buy down,” you will have made good on all your deferred tax obligations on your home. With the slate wiped clean, your new tax basis would be the purchase price of your new home, or $200,000, an amount substantially higher than your current basis.

But the price for this is pretty steep, and you might want to reconsider the wisdom of your entire proposal. Michael Blue of Blue & Lucove CPAs in Woodland Hills suggests that you take full advantage of the IRS’ two-year home replacement rule. According to the tax code, you have two years in which to move into a new house. Blue suggests that you wait the full period on the theory that your financial condition could improve to the point that, in two years, you may want to buy a more expensive house than you do now.

According to this strategy, you would initially rent a house and live in it until your new business gets off the ground. Then, as the two-year point approached, you would buy and move into your “real” replacement residence. If your new business is a success, you will probably be able to do better than a $200,000 model. The upshot is that you get a better house--and you reduce your tax bite.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.