Alimony and Property Settlement (LO. 4) Alicia and Rafel are in the process of n

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Alimony and Property Settlement (LO. 4)

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 $ .

b.  Rafel would receive a before-tax amount equal to $ . The $17,600 Rafel pays Alicia is considered Select alimony part of the property settlement Item 3and, therefore, Select would would not Item 4be deductible by Rafel.

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

Below-Market Loans (LO. 4)

Indicate whether the imputed interest rules should apply in the following situations. Assume that all of the loans were made at the beginning of the tax year unless otherwise indicated. If an amount is zero, enter "0".

c. Jody borrowed $25,000 from her controlled corporation for six months. She used the funds to pay her daughter's college tuition. The corporation charged Jody 4% interest. The Federal rate was 5%. Jody had $3,500 of investment income for the year.

The imputed amount is $_________

d. Kait loaned her son, Jake, $60,000 for six months. Jake used the $60,000 to pay off college loans. The Federal rate was 5%, and Kait did not charge Jake any interest. Jake had dividend and interest income of $2,100 for the tax year.

The imputed amount is $_______

Explanation / Answer

a. Alicia would receive a before-tax amount equal to $280,000. (560,000/2)

b. Rafel would receive a before-tax amount equal to $280,000 (same as a.) The $17,600 Rafel pays Alicia is considered part of the property settlementItem and, therefore, would not be deductible by Rafel.

c. Rafel's basis in the investment assets he receives will be $160,000. Therefore, if the investments were sold for their current value, Rafel would have a $250,000 taxable gain. (Fair market value $410,000- Investment cost 160,000= $250,000 Gain)

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