broke the bad news. The exemption is only applicable to a primary residence. In order to use it, she would have had to have lived there
for two years. Since she didn’t, the entire gain is taxable. She’s also a highly compensated individual so her rate is not 15 percent but 20
percent and oh, don’t forget to add the new Medicare surcharge which raises it to 23.8 percent so her tax bill is $58,429.
And let’s not forget she also got 401(k) assets and had to pay tax on those too! Let’s look at a revised chart.
Dan
1. Principal Residence
*net after sales cost and tax,
no appreciation added
Net
$400,000
$378,500
Net
$300,000
2. Vacation Home
Sue
$222,071
3. 401(k) $150,000
*Dan@28%, Sue@39% tax
$25,000
$18,000
$125,000
$76,250
4. Checking and Savings
$30,000
$15,000
$15,000
$15,000
$15,000
TOTAL ASSETS = $880,000
$440,000
$411,500
$440,000
$313,321
Dan’s assets are worth $98,179 more than Sue’s. How likely do you think Sue will be to refer her friends to her divorce attorney?
There were much better ways to structure this settlement that would have been more equitable. But as you know, once that decree is
written, it’s pretty tough to go back and fix things. Do right by your clients and either take the time to really evaluate their settlement
results or bring in an expert who can. At the very least, recommend your client review the plan with a CPA or CDFA™. Mistakes like
these could turn you from being the counsel for this client to t he defendant against her lawsuit against you.
Vol. 5 No. 10 Attorney at Law Magazine® Greater Phoenix | 19