qualified domestic relations order

Technical topics regarding tax preparation.
#1
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my client is getting a divorce and will receive the primary home that she wishes to sell immediately after the divorce and the gain realized will be approximately 475k. she will also receive a check or funds in the amount of $75k from the husband's 401k. she is 56 years old and he is 61 years old.

my client wants to ensure that the property settlement agreement is written in such a way that she does not pay income tax. from what I understand the transfer of the 75k to my client is tax-free if made pursuant to a qualified domestic relations order? This is incident to divorce and is between spouses?

the primary home will be transferred in name as separate property to my client; she wants so to avoid all tax or capital gains. Can she do so, or is this an issue where the taxable portion for capital gains purposes (amounts over 250k) should be negotiated in the property settlement agreement, and if not is it advisable to sell the property prior to divorce? this was the primary home, purchased in 2017.
 

#2
Nilodop  
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The QDRO will enable the $75k to be rolled over to her IRA.

Section 1041 allows the transfer of the home to W to be free of tax, but it's treated as a gift, so basis carries over. So I think she'd only have the $250k exclusion. The $500k is only available on a joint return.

But wouldn't the $500k effectively be available as $250k to each of them, by having them agree to sell the property jointly (I assume they are both on the deed), and then have H pay half the proceeds to W?
Last edited by Nilodop on 21-May-2022 7:58pm, edited 1 time in total.
 

#3
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Problem w IRA subject to 10% penalty until age 59.5. If client stays as alternate payee on 401k then no 10% just tax on withdrawals.
If H stays on title can get $500k 121 but does not have to live in home.
 

#4
Nilodop  
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10% penalty if rolled over??? Why?
 

#5
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10% penalties on IRA withdrawals until age 59.5 not on the rollover to.IRA has no QUADRO exception
 

#6
Nilodop  
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Got it. Not via QDRO. But still can go from H's IRA to W's IRA w/o current taxation, right?
 

#7
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Yes
 

#8
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my understanding is that the 75K will transfer over to the spouse from H's 401k as cash. I understand that if it made pursuant to a QDRO then the spouse in this case receives the funds free of tax to her?

The issue here is that she is receiving cash and the question has become who pays the tax. Again, if made by QDRO then the husband or the transferor pays?
 

#9
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Under a QDRO, the distributions to the spouse are treated as if the spouse was the plan participant. Spouse would pay the tax, but not penalty, if not rolled to another retirement plan.

Could it be that the agreement is for original plan participant (H) to take the distribution and give the spouse the cash? If so, the original plan participant (H) would pay the tax.

If receiving spouse takes the distribution from the plan via QDRO, RS pays the tax.
 

#10
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I agree with your response Yellowdog, however I was under the assumption that if the receiving spouse is younger than 59.5 and cashes in her distribution, then she would be subject to the premature withdrawal penalty?
 

#11
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Not if distribution is received via the QDRO. 72(t)(2)(C) I believe. But RS will pay the tax.

Remember if receiving spouse rolls QDRO distribution to another plan, then withdraws from that plan, the 10% penalty rules will apply.
 

#12
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let's qualify one remaining issue. I understand that if the transfer from an individual retirement account (IRA) is made, this is done by court order, trustee to trustee, and premature penalty does apply. No QDRO applies here

I understand that a QDRO is necessary with respect to a 401k or qualified retirement or pension account. Transfers to an alternate payee, incident to divorce, and if distributed after the transfer that NO premature penalty applies?
 

#13
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If the original 401k monies, in your case the husband’s 401k, are transferred to a qualified retirement plan of the alternate payee (401k, traditional IRA, etc.), and the alternate payee takes a subsequent distribution from the latter plan, AP will pay tax & penalties under the penalty rules. If the distribution from the husband’s 401k is paid directly to the AP under the QDRO, AP pays the tax, but has an exception to the penalty: payout due to QDRO.
 

#14
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if the house is sold prior to divorce, both are on title, they file separate returns, can they each take the 250k exclusion?
 

#15
Nilodop  
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Yes. 11.121-2(a)
(2) Joint owners. If taxpayers jointly own a principal residence but file separate returns, each taxpayer may exclude from gross income up to $250,000 of gain that is attributable to each taxpayer's interest in the property, if the requirements of section 121 have otherwise been met.
 

#16
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if the house is sold prior to divorce


Can do after divorce. see https://www.thetaxadviser.com/issues/20 ... usion.html

For purposes of the home-exclusion rule, a taxpayer can be treated as using the principal residence during the period of ownership that the taxpayer’s spouse or former spouse is granted use of the home under a divorce or separation agreement that meets the criteria of Sec. 71(b)(2); see Sec. 121(d)(3)(B) and Regs. Sec. 1.121-4(b)(2).

Example 3: After their divorce, S and C continue to own their former marital residence. S moves out of the house. Under the divorce instrument, C is awarded use of the property and continues to use it for the next five years. If S and C sell the property in the fifth year, S (as well as C) can use the Sec. 121 exclusion because S will have met the ownership test on his own and will meet the use test by tacking on C’s use of the property.
 


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