Plan on Deducting Child Support? Forget It
Q: I am thinking of buying a home to rent to my ex-wife in lieu of paying her child support for our daughter. I would own the house and deduct my mortgage payments and expenses as business costs. I would then forgive the rent in lieu of child support. I think this plan would work to both my tax advantage and that of my ex-wife, since the amount of rent she would not have to pay would exceed the amount of child support I am supposed to pay. Are there any problems with this plan? --I.K.
A: Plenty of them. According to the accountants we consulted, it will be impossible for you legally to accomplish your apparent goal: shifting your child obligation to a deductible expense. However, if your goal is simply to provide decent housing for your child and ex-wife while investing in some residential real estate, your plan might still work.
Here’s what the experts say: If you don’t charge your ex-wife any rent, you will still have to declare as “constructive income” the amount of your child support obligation, regardless of the fact that no money has actually changed hands. This constructive income would be subject to ordinary income taxes; however, it would be offset by mortgage and tax expenses. This fact may make the rental proposition less attractive, but perhaps there are still some advantages.
If the amount of child support you are obligated to pay is roughly equivalent to the fair-market rental value of the house you provide your ex-wife and child, our experts say the IRS would likely consider this house to be a simple rental property. As such, you would be entitled to deduct the mortgage and property taxes and enjoy any appreciation in the value of the property. (Of course, you would still declare the forgone rent as income.) However, if the gap between your child support obligation and the rent you are not charging your wife is great (perhaps in the realm of several hundred dollars), our experts foresee complicated problems and no assured answer. Some believe the IRS might require you to consider the rent you are not getting, beyond the child support payment, as a “constructive gift” to your ex-wife and child. Although the gift would not be taxable to your ex-wife and child, it would be to you. Surely, this is to be avoided.
So, it all hinges on the margin between the fair-market rent and your child support obligation. If the numbers are fairly close, your plan might work. But do not think for a minute that you can turn your child support obligation into a tax write-off.
Tax Basis in House Is What You Pay for It
Q: I would like to sell my house and buy a less-expensive one, but first I need to know how to figure my capital gains obligation. I bought the house with a partner for $259,000. Later, I bought out my partner by refinancing the house for an additional $80,000. Now the mortgage loan is $300,000. What is my basis in the house? -- S.S.
A: Assuming that the house was used as your residence and not a rental that was depreciated, our experts say your tax basis would be half the original purchase price ($129,500) plus whatever you paid your partner when you bought out his half-interest.
The accountants we consulted said it doesn’t matter where you got the money to buy out the partner--a refinance or a loan from your family or from your stock brokerage account. What matters for the purpose of computing your potential capital gain obligation is what you paid your partner for his share.
Drivers Can Appeal DMV Late Charges
Q: Too bad the Department of Motor Vehicles hornswoggled you! In a recent column covering DMV late registration penalties, you said there was no appeal process. Well there is, but it’s a well kept secret by the bureaucracy. Ask them about it. I did and won a refund. --J.A.
A: This reader is referring to the “application for refund” form. This form, available at all local DMV branch offices, can be completed only after the car owner has paid the penalty. But it does allow the owner to challenge the assessment and explain why it shouldn’t have been levied--and paid.
The DMV acknowledges that the form can produce results if its computers show that the state failed to send a registration notice to the car owner or that the form was returned to the state because of an incorrect address. However, the department warns that it refunds very few penalties.
Nevertheless, the bottom line is that car owners do have recourse--even if the chances of winning are slim.
Ventura Allows Shifting of Pre-Prop. 13 Tax Base
Q: In a recent column you listed Ventura County as one of the 13 counties in California allowing home buyers over age 55 to transfer their pre-Prop. 13 property tax base to a new home of equal or lesser value. Are you sure this information is correct? --T.R.
A: Yes. The Ventura County Board of Supervisors voted earlier this year to join the program established under Prop. 90, the 1988 initiative creating this loophole to the Jarvis Initiative. However, in Ventura County, the Prop. 90 exclusion only affects homes whose purchase is recorded on or after May 4, 1992. Home purchases recorded prior to that date--even if they meet the other criteria of the Prop. 90 exclusion--are not eligible for this generous tax break.
