Page 624 - TaxAdviser_2022

the home sale in a post-divorce year. rights and a divorce occurs within the Assume that in 2021 the taxpayers fi-
Sec. 121(d)(3)(B) provides that an three-year period beginning on the nalized their divorce. Spouse 1 is entitled
individual moving out of the marital date one year before the agreement is to the entire capital loss carryforward of
home is treated as using the property entered into, any transfers of property $4,000 on his or her 2021 tax return be-
as his or her principal residence dur- or interests in property in settlement of cause the capital loss carryforward was a
ing any period of ownership that such marital or property rights or to provide result of Spouse 1’s $15,000 short-term
individual’s former spouse is granted reasonable support for minor children capital loss.
use of the property under a divorce or are considered to be transfers made for
separation agreement and will qualify full and adequate consideration and NOL carryforward or carryback
for a $250,000 exclusion of gain upon are not considered taxable gifts. If the When taxpayers change their filing
the sale of the residence. requirements are not met, the transfers status pursuant to a divorce, Regs. Sec.
If the spouse who continued living are subject to gift tax, and the spouse 1.172-7(d)(1) provides that carryfor-
in the marital home remarries, sells making the transfers must file a gift ward and carryback net operating losses
the home, and files a joint return, the tax return. (NOLs) generated by both spouses are
couple can exclude up to $500,000 of allocated by the joint NOL that is at-
capital gain on the sale of the property Income tax attribute tributable to the income and deductions
because Sec. 121(b)(2)(B) requires only carryforwards of the spouses as if each had separately
one taxpayer to meet the ownership Tax advisers should analyze the final computed their income and deduc-
test. In this scenario, the taxpayers can joint tax return and determine how tions. If the NOL was generated by one
collectively exclude up to $750,000 of taxpayers will report carryforwards in spouse, the carryover is only available to
gain on the sale of the home because years subsequent to the divorce. Income the spouse who generated the loss. Rev.
the former spouse also qualifies for tax carryforwards used in future years Rul. 80-7 provides guidance on alloca-
a $250,000 exclusion of gain on the have current value and should be tion of estimated tax payments and over-
home sale, assuming the divorce decree considered in calculating an equitable payments on a joint return that are used
was properly drafted. allocation of assets. when an NOL from separate returns is
carried back to a prior joint return.
Gift tax issues related to Capital loss carryforwards
property transfers Regs. Sec. 1.1212-1(c)(1)(iii) provides Suspended passive
There can also be gift tax issues related that if a capital loss is reported on activity losses
to property transfers in a divorce. a joint return, the carryforward is If investments reported as passive activi-
Proper planning eliminates the need to allocated between spouses on separate ties are transferred to a spouse pursuant
use the taxpayer’s lifetime exclusion to returns, based on which spouse incurred to a divorce settlement, Sec. 1041(b)
transfer assets upon a divorce. the capital loss. provides that the taxpayers will treat the
Sec. 2516 provides that if a married Assume the taxpayers had the capital passive activities as acquired by gift, and
couple enter into an agreement gains and losses as shown in the table, the transferee’s basis in the property will
regarding their marital and property “2020 Joint Tax Return.” be the carryover basis of the transferor.

2020 joint tax return

Capital loss
deducted on Capital loss
Spouse 1 Spouse 2 Net gain/loss 2020 return carryforward

Short-term capital gain (loss) ($20,000) $5,000 ($15,000) $3,000 ($4,000)

Long-term capital gain (loss) $10,000 ($2,000) $8,000

www.thetaxadviser.com December 2022 15