Divorce Settlement

[Mike9241]

if it is to be paid back it's a loan not a gift. it doesn't really matter to you. nothing to report on your return. the amount is below the threshold requiring intertest. so, if no interest is being paid there is no reporting for either party.  if interest is paid, to you it's income. but your son cannot deduct the interest payment unless these three items are true:

1) there's a signed document making the home security for the dept. 

2) the instrument provides in the case of default the home could satisfy the debt

3) it's recorded or perfected under the laws 

[Anonymous_]

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@AndrewA87 wrote:

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

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Repayments of loan balances are not considered to be income for federal income tax purposes and, as such, do not need to be reported on your federal income tax return.

What may become an issue here is whether you be receiving the $16,000 directly from your son or some other party. If, for example, the settlement agent (title company or similar entity) issues the check and a 1099-S, then you will have to report that payment on your return.

[Opus 17]

@AndrewA87 

If you treat it as a loan for income tax purposes, the return of the principal amount is not taxable income. You would report imputed interest income, equal to the interest that you would have received if you had charged interest, using the minimum applicable federal rate in effect at the time of the loan.  

[AndrewA87]

So if a 1099-S I would report it, but if the title company just issues a check then no need to report?

I wonder if the title company could issue the check to my son and then have him gift me that money?

[rjs]

@AndrewA87 

You need to sit down with a lawyer (your own lawyer, not your son's lawyer) and figure out what's going on. I don't see how the closing attorney or title company can direct any payment to you, or issue a 1099-S to you, if you are not a part owner of the house. That provision in the divorce agreement might not even be legally valid.

And as others have said, a gift doesn't get repaid.

[Opus 17]

@AndrewA87 

A 1099-S is issued to the sellers.  There is no legal basis to issue a 1099-S to you if you are not on the title, and there is no reason that your son or his ex-spouse should even mention this side arrangement to their closing agent when they sell the home.  Even if your son instructs the closing agent to send $16,000 to you directly before dividing the remaining proceeds, that doesn’t make you an owner of the property and there is no reason you should receive a 1099-S.  

(A 1099S is a notification to the IRS that a person has sold a home. It doesn’t necessarily mean that any taxes are owed, but whenever a 1099S is issued, it must be addressed on the tax return in some manner.  There are several ways you could do this.  But even if you are treated as a lender, a lender does not get a 1099S, only the sellers.)

I really think this discussion has gotten out of control, and is ranging into ever more complicated side topics. The plain fact is that if the $16,000 is returned to you, it will never be taxable income, whether it is a gift or a loan.  A strict interpretation of IRS regulations might require you to report interest income on the loan, but there is more than a 99% chance that this will never come to the attention of the IRS.

[Anonymous_]

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@Opus 17 wrote:

A 1099-S is issued to the sellers....

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The statements are issued to anyone with an ownership interest in the subject property and the title company could conceivably conclude that is the case based on some tortured reading of the settlement agreement (which could be reinforced by the son and his ex, both of whom are parties to the sale) or simply a direction by the parties to the sale (I have personally seen more bizarre results from title companies).

I agree that this discussion has gotten out of control and @AndrewA87 should consult local counsel.