Rental between ex-spouses

[Kea]

Why do we always get these situations in April?

(Austin) clients I've had for many years got divorced in April 2007 (no kids). It appears I was lucky enough to get both of them in the divorce settlement - something they were aware of. They seem to still be talking to each other - including tax info.

I prepared return for ex-husband in February. Ex-wife came in a couple of days ago. I did point out to her that if there were going to be any conflict of interest issues, that I couldn't do it. She seemed to think everything was OK.

He had been in Chicago getting an MBA. He graduated in May and moved to Houston at that time. He had mortgage statements which were in his name and social. One of the mortgage statements showed property tax paid. Started renting out house in July. House became 100% rental in July claiming 1/2 year prop tax and mortgage. Other 1/2 on Sch A. (Because we both knew that ex-wife had office in home until she moved out, I took the 1/2 year one room depreciation into account when figuring the basis for the rental house.)

Ex-wife moved out of house in late June. She is self-employed and is claiming office in home up through June. She tells me that house is titled in her name only, but knows the mortgage is in his name so she has no problem with his claiming. She volunteered this info - I did not tell her what I claimed on his return. She also told me that she sent him the money for the mortgage. For office in home, I left depreciation carrying forward from prior year, and I took the utilities.

Ex-wife becomes concerned that the office in home does not show mortgage interest or rental payments. She thinks IRS will find this strange. She tells me that since she is paying him the mortgage, that should count as rent to her. Bear in mind that for Jan - Apr they were still married and TX is community property state. (Granted, since they file single for 2007, I do NOT try to divide community property income / expenses during the joint months. Hard enough to do on MFS, I'm not trying it with a divorced couple!) So, I ask if it was set up as rental. She seems to think that it basically is. Since I cant' tell her how I prepared his return, I tell her to talk to ex to discuss. Somewhere in there I mention that if it is a rental deduction to one person, it's income to the other.

Next day I get a call from ex-husband who wants me to run some figures to see what it does to his (completed) return if he shows the rental income. I mention that it moves the property tax and interest to Schedule E from Schedule A. (I have not yet told him it might just decrease his taxes slightly if he also gets the depreciation.)

But, I still haven't really convinced myself that this qualifies as rental. This was the house they lived in together for most of the marriage. If it's something they both agree to, am I just being too stubborn / lazy? I'm also getting confused with the issue that she owns it but the mortgage is in his name.

Thanks for any answers and for the chance to vent.