Problem: Arnold and Barbara Cane were divorced in June 2008. Pursuant to the divorce decree, Arnold is obliged to preform as follows:
Q1. Transfer title of their personal home to Barbara. They purchased the house in 1992 and their basis today is $400,000. The fair market value of the house is $500,000. The house is subject to a 25 year, $250,000 mortgage.
Q2. Arnold is to continue making payments on the house until it is fully paid off. In 2008, Arnold made payments totaling $18,000.
Q3. Arnold is to make $3,000 per month payments to Barbara. Of this amount one half is for child support. The divorce decree further states that alimony is to cease upon the death of the wife. In 2008, he made six payments.
How do the transactions in the divorce agreement affect Arnold's and Barbara's taxable income?