Financial Loss in the Sale of Personal Resident cannot be Deducted from the Income for Purposes of Calculating Child Support

Since the financial collapse of 2008, many people have suffered the financial indignity of selling a residence for less than they paid for it.  Such was the case of K.J.P. v. R.A.P. recently decided by the Pennsylvania Superior Court on May 22, 2013.  The Appellant in the case, a father order to pay child support for children, attempted to deduct a $115,000.00 loss on the sale of a property in New Jersey from income.

Father asserted that the property which he sold was a business property in which he had invested in and which he intended to renovate and flip.  The Court noted that the Father had, in the past, participated in such activities but further noted that he had lived in the property for a two year period before selling the property.  Because this was during the time of the financial collapse, this may have been because the property could not be sold.  At any rate, after considering the tax consequences of living in the property for two years and whether or not the property would qualify for deduction as a business loss for tax purposes, the Court determined that the property was, in fact, a residential property and the residence for two years of the obligor Father.  The Court further noted that the Father had not included income from property which he said he was flipping in the past in calculating child support.  The only issue remaining before the Court was whether the Master properly excluded from the Father’s income the net loss he suffered at the time he sold real estate in which he was living.

Income is defined in the Domestic Relations Code at 23 Pa.C.S. Section 4302 and under the Pennsylvania Supreme Court Guidelines at Pa.R.C.P. 1910.16-2(a)(2).  The Domestic Relations Code states:

“Income includes compensation for services, including but not limited to, wages, salaries, bonuses, fees, compensation in kind, commissions and similar items; income derived from business gains derived from dealing in property; interest; rents; royalties; dividends; annuities; income from life insurance; all forms of retirement; pensions; income from discharge of indebtedness; distributive share of partner gross share; income in respect of a decedent; income from an interest in an estate or trust; military retirement benefits; railroad employment retirement benefits; social security benefits; temporary and permanent disability benefits; workers’ compensation; unemployment compensation; other entitlements to money or lump sum awards, without regard to source, including lottery winnings; income tax refunds; insurance compensation or settlements; awards or verdicts; and any form of payment due to and collectable by an individual regardless of source” 23 Pa.C.S. Section 4302 (emphasis added)

Note that the definition includes “gains” derived from dealing in property but not losses.  While the Father asserted that the trial court erred in concluding that the sale of his primary residence did not constitute a dealing in property, the definition, while including dealing in property, deals with gains not losses.  The Court also determined that the guideline included net income of business or dealing in property but not from the sale or residence.  While the Court considered how the Internal Revenue Code would view sale of a residence for a loss, that was not the basis of its ruling.

The Superior Court upheld the trial court in determining that loss on the sale of a principal residence is not deducted from the income before applying income standards to the calculation required for determining child support.