Friday, February 26, 2010

We're married! Uh, no we're not....

Riddle: When does a divorce not follow a marriage ceremony?

Answer: When the marriage is a common law marriage.

Seem weird? Or maybe you didn't know that 10 states still allow you to form a common law marriage?

It's true: in Alabama, Colorado, DC, Iowa, Kansas, Montana, Rhode Island, SouthCarolina, Texas and Utah, it's still possible to form a common law marriage. Oklahoma's tried to ban them after 1998, but there's a question of whether that ban is valid. And Ohio (1991), Idaho (1996), Georgia (1997) and Pennsylvania (2005) allowed them up until recently (the year indicates the latest year that the requirements could have been satisfied for a valid marriage). New Hampshire will recognize a common law marriage for probate purposes only.

There's a catch: even though you never had a marriage ceremony of any type, if you have a common law marriage, you MUST get divorced for any subsequent marriage to be valid. And even though you cannot form a valid common law marriage in other states, the principle of comity would cause the marriage to be valid if it was formed in a state that did. This makes sense, since couples united in common law marriage have the same rights as those married by a JOP or in a religious ceremony.

Interestingly, the standards for such a marriage are not set in stone. For example, every state requires cohabitation for a common law marriage to be valid, but none specifies how long. When I was in law school, the rumor was 20 years, but in fact the standard seems only to be a 'substantial' period of time, without definition.

The other problem is that many people believe that common law marriage is recognized everywhere (it is, subject to the constraint that it was formed legally) and that it can be legally formed everywhere (it can't). And therein lies the rub - your client tells you he's married, but IS he? You have no affirmative duty to verify (imagine asking your client for a marriage certificate!), so you take him at his word. Then it turns out he wasn't actually married - he thought he was, because he bought into the common law myth - and now your client is forced to revise his return, with negative consequences.

Then there's the flip side - people who WERE common law spouses, who never got a legal divorce, then subsequently 'married' another. Imagine their surprise when you tell them that they aren't married to their new spouse!

Truth is, you'll never really be able to catch these before its too late. Some idle banter ("how'd you guys meet?" and the like) might give you clues to inquire further about the validity of one's marriage, but often this stuff rears its ugly head long after you've prepared the return and generally for an out-of-the blue reason. The best you can do is document, document, document, and keep in mind that all may not be as it seems.

Oh, and lest you think this is just an oddity - I've had two such situations in the last 4 months. Seriously. Fortunately, I've been the guy called in to fix things, but it makes me think every time I prepare a married couple's tax return...

Tuesday, February 23, 2010

Allowed vs. Allowable

For some odd reason, this tax season I've run across a number of tax returns which fail to calculate depreciation (and it's only February!).

My suspicion is that the prior preparer (not in my office) thought that they'd be clever and not claim depreciation, knowing that it's recaptured when the property is sold. You can't recapture what you haven't taken, right?


The IRS has a principle called 'allowed or allowable'. Here's their take on it:

"You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation which you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.

If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable.

If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed)."

In short, you're paying tax on the depreciation recapture, whether or not you actually claimed it (and if you claim too much, on the excess, too). So those people who think they're being clever are in for a rude awakening when they sell the property. Sadly, because of depreciation, it is possible to sell a property for less than what you paid for it and still have a gain! Not good news for landlords.