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Divorce Settlement

My son divorce agreement states that Both parties agree that the Husband father let them borrow $16,000 to purchase the home and it is agreed that this sum shall be paid back to him from the proceeds of the sale of the propert/martial home.

 

The $16,000 was a gift to my son to purchase the home.

 

How will I report this on my 2023 income tax return?

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21 Replies

Divorce Settlement


@asarbuckle wrote:

The $16,000 was a gift to my son to purchase the home.


Was it actually a gift or a loan?

 

You do not have to report gifts of a present interest that are $16,000 or less for the 2022 tax year ($17,000 or less for 2023).

 

See https://www.irs.gov/instructions/i709#en_US_2022_publink16784xd0e649

Divorce Settlement

Please explain what you are trying to do.  Whose tax return are you preparing---your own or your son's?   If you gave your son a gift of $16,000 it does not go on either your own income tax return or your son's tax return.   If you gave your son a loan, that is different--so....which was it----a gift or a loan?

 

And....what do you mean by "the Husband father?"    Is that someone else who also gave or loaned money to them?

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

Divorce Settlement

We may need to know why the divorce agreement said it was a loan.  Are there plans to sell the home, and if so, does your son actually plan to pay you $16,000 off the top before the proceeds are divided?  If he does that, what would you do with the money (reinvest it? give it back to your son?)

Divorce Settlement

It was a gift.

 

I guess I am wondering since it was a gift and is being returned to me as a part of the sale of the house would it be considered income that needs to be reported.

Divorce Settlement


@asarbuckle wrote:

I guess I am wondering since it was a gift and is being returned to me as a part of the sale of the house would it be considered income that needs to be reported.


More details are still needed. It was not a gift if it was made with the advance understanding that the $16,000 would be returned to you at some point in the future.

 

True gifts are unconditional.

Divorce Settlement

I am concered about my 2023 income tax return. I gave my son $16,000 to help him purchase their house. Their divorce settelment states that the $16,000 is to be paid back to me.  It was not a loan but a gift.  Because it was a gift and not a loan would that be considered income from the sale of the house.

 

The mortgage papers says it was a gift but their divorce papers says it was a loan.  We gave the money to them with no expectations of being repaid.

 

So if it was a loan how would that be reported?

Divorce Settlement

It was a gift and we never expected repayment.  When the divorce settlement was drafted we asked if we could get the money back when the house was sold and that provision was granted.

Divorce Settlement


@asarbuckle wrote:

The mortgage papers says it was a gift but their divorce papers says it was a loan.  We gave the money to them with no expectations of being repaid.


Based upon those facts, it was a gift and does not need to be reported on any income (or gift) tax return since it was within the annual exclusion for gifts of a present interest.

 

It would be difficult to imagine how you would be a party to your son's divorce (in the event anyone else raises that as an issue). 

Divorce Settlement

d) Division of Sales Proceeds: Both parties agree that the Husbands father let them borrow Sixteen Thousand Dollars ($16,000) to purchase the home and it is agreed that this sum shall be paid back to him from the proceeds of the sale of the property/martial home before a division is made between the parties of any remaining proceeds from the sale of the marital property.  At the closing of said sale, each party will be entitled to one-hale (1/2) of the "net sales proceeds" as define herein and shall direct the closing attorney or other responsible person to divide same the parties equal shares. For purposes of this Agreement, the term "net sales proceeds" shall mean the gross sales proceeds due the seller less the outstanding balance on the first mortgage, the sum of Sixteen Thousands Dollars ($16,000) owed to Husband father shall be paid off and commissions, taxes, or other expenses of the sale for which the sellers are liable. 

 

When my son and his ex-wife bought the home the money was given as a gift.

 

But I wonder if the divorce settlement changed that?

Divorce Settlement

The divorce and the house in question are my son's.

 

I guess I am wondering if the $16,000 that is being returned to me from the divorce settlement is taxable.

 

The $16,000 that is being returned to me is not a gift to me.

Divorce Settlement

The agreement in the settlement is between your son and his ex; you are not a party to that agreement (unless you otherwise agreed to the terms, which is unlikely).

 

If the $16,000 is being returned to you with reference to the agreement (settlement terms), then the payment could be considered as a repayment of a loan, but neither a gift nor taxable income to you. 

Divorce Settlement

@asarbuckle 

The divorce settlement does not necessarily have any impact on your tax situation. It is a completely independent document. If you were audited for some reason, the divorce document is one factor that an auditor might take into account. However, I assume that you were required to produce a gift letter for the mortgage lender. That would also be taken into account. and of course, audits are very rare. 

If we assume this was a loan all along, then:

The IRS assumes that taxpayers will conduct their affairs in a businesslike manner, and this includes charging interest on loans. The interest is taxable income, but the return of the loan principal is not. If you don’t charge interest, the IRS requires that you report “imputed interest“, this means that you report income equal to the amount of interest you could have received if you charged interest, even though you didn’t charge interest.  You must use at least the minimum applicable federal interest rate, or AFR.  This is a variable rate that is currently between 4% and 5%, depending on the term of the loan, but it has been much lower in the past.

Let’s assume you made the loan when the AFR was 3% and interest is compounded annually.  That would mean that you would be required to report $480 of interest income for every year that the loan balance was outstanding. When the home is sold, you don’t report the return of the principle as income.

 

If the facts of your situation, independent of the divorce settlement, are that this was a gift, then it was not reportable, and no tax was owed when you made the gift, and there is no income to report when the gift is returned to you, because that would simply be a separate gift from your son to you.

 

If the facts of the situation are that this was a loan, then you would be required to report imputed interest on your tax return using the AFR that was in effect when the loan was made.

 

If this was a true gift, you can treat it as a gift and follow the appropriate procedures. In the unlikely event you are audited, you can show documents that the money was a gift. If an auditor looks at the return of the $16,000 and determines that based on the weight of the evidence that it was a loan, then the consequence to you are that you would file some amended tax returns to report imputed interest income and pay a small amount of income tax plus late fees.

 

What I am much more concerned about is why does the divorce settlement indicate this money was a loan? Where did that information come from, and why did the attorneys and the spouses both agree to this if it was not originally true?  I can't think of any legitimate reason for the parties to agree this was a loan if they both knew it was a gift. 

 

 

 

Divorce Settlement

I am not sure why it was worded that way in the divorce settlement. 

 

My wife and I gave the money to my son as a gift with no requirement or expectations of him repaying it.

 

When my son bought the house their loan application stated - In the Uniform Residential Loan Application Type it states Asset Type:Cash Gift, Deposited Source:Relative, Cash or Market Value $16,000.00.

 

 

 

Divorce Settlement

So would I report it as income if it was consdered repayment of a loan?

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