Here is an answer from members of the Maryland Association...


March 25, 1994

Here is an answer from members of the Maryland Association of Certified Public Accountants to a reader's tax question. The Sun will publish answers through April 15.

Q: In 1992, I entered into a property settlement agreement with my husband (since divorced) whereby I paid a lump sum of money in exchange for title to our home. The lump sum was held by him in the form of a second mortgage on the house. I sold the house in the first quarter of 1993 and the settlement included payment of the second mortgage to my ex-husband. I thought that my basis for the house would include the purchase price and the amount of the second mortgage because I paid out this cash to secure the ownership of the house. Based upon tax literature I am reading, I am liable for income tax on the money I paid to obtain sole ownership in my home that I sold during the first quarter of 1993. I now do not expect to purchase another home during the two-year period.

Given the above: 1. How can I legally not pay taxes on this money, which was in reality not income? 2. If I must pay taxes, will I be penalized because I did not pay quarterly taxes?

A: When a sale occurs between spouses, or when property is exchanged in a property settlement arising from divorce, no gain or loss is recognized for tax purposes, and there is no adjustment for the gain or loss in the basis of the property. So, in your case your basis is the original purchase price increased by the cost of any improvements. Since you do not intend to purchase a new home within the 24-month period, the gain is taxable in 1993.

The penalty for underpayment of taxes is assessed if you have not paid at least 90 percent of your current year taxes during the year you incur the tax liability. There are exceptions and they vary. If your adjusted gross income (AGI) increased by more than $40,000 over 1992, and your 1993 AGI is greater than $75,000 and you were required to make estimated tax deposits or had an underpayment penalty assessed in any of the preceding three years, you must make estimated tax deposits equal to at least 90 percent of your tax liability during the year the income is earned. If you do not meet these requirements, you may be able to avoid this penalty if you have paid through withholding taxes and estimated taxes an amount equal to your 1992 taxes. Note that these rules have changed for 1994.

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary. Consult with a tax adviser for specific advice.

To ask a tax question by phone, call Sundial, The Sun's telephone information service, at (410) 783-1800. In Anne Arundel County call 268-7736, in Harford County 836-5028, and in Carroll County 848-0338. Using a touch-tone phone, enter 6120 after the greeting.

Written queries may be sent to TAX QUESTIONS, The Baltimore Sun, Business News Department, 501 N. Calvert St., Baltimore 21278. Fax questions to the Business News Department at (410) 783-2517.

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