I apologize for the convoluted title, but I couldn't come up with a better way of wording it.
My wife and I recently were married. Her old home, currently occupied by her ex, is for sale and may finally be moving close to a sale. The home was built for ~140-160k about 4 years ago and should sell in the neighborhood of 300k. Thus, her take should be, when all is said and done, including some other items, 70-90k.
Now, here is where I come to my question. How is this 70-90k treated? The house was owned for >2 years, so I know it will not be short term capital gains, but it would be a capital gain none the less. Usually this can be avoided by investing the money back in a new home. However, we already live in a home that is in my name(so I could get the $8,000 tax credit. Yes, it was bought before we were married). What can be done with that money to avoid a hell of a tax bill?
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I think the rule is if your wife and her ex lived in the house for 2 years in the past 5 years the cap gains taxes are exempt. The exemption doesn't require investing in a new home anymore. Look up the precise rule from irs.gov.
1031 exchange doesn't really apply here. She's not buying another house.
nycll--Thanks. I was not aware of that.
My assumption would be that she is not punished tax wise for her ex continuing to live in the house. I would hope she could still claim the 2 out of last 5 year exemption, but at this point, it would be getting close as to her actually physically being there 2 out of last 5 years.
Yep, section 121 exclusion. If it was her main home for 2 of the previous 5 years, and she hadn't excluded gain from another home in the past 2 years, you should be fine to exclude at least $250k of the gain (if not the whole $500k - I'd have to double check that, but first thought is you can do the whole 500k). In your case, the $250k is more than enough.
Does SHE have to have used it as her main home 2 of previous 5 years? That one is going to be cutting it close. Documenting it would be near impossible.
largeeyes said:The home was built for ~140-160k about 4 years ago and should sell in the neighborhood of 300k. Thus, her take should be, when all is said and done, including some other items, 70-90k. What real estate market has increased in value 100% in the past 4 years? Did she and her ex build it with their own hands?
Message edited by: RedCelicaGT on 2009-10-28 14:46:29 CDT
They had owned the land(the most valuable part, which probably has doubled in value in the last 6-10 years) for a number of years earlier. They then built the house, doing a lot of work themselves.
largeeyes said:Does SHE have to have used it as her main home 2 of previous 5 years? That one is going to be cutting it close. Documenting it would be near impossible.
Documenting it should be easy. Her move-out date is probably in the court records. Date of sale is also known. If she built it on land she already owned, the date it was certified for occupancy would make a good move-in date. If sale date - move-in date < 60 months, then Sec. 121 occupancy is move-out date - move-in date.
If move-out in less than 24 months was caused by certain factors (I do not remember if divorce/separation was one of them), then she would be eligible for a pro-rated portion of the $250,000 cap, which should handily exceed the profit. Taking a job farther away from the old home than from the new home is definitely one of the factors, I believe it had to be 60 miles farther.
taxmantoo said:largeeyes said:Does SHE have to have used it as her main home 2 of previous 5 years? That one is going to be cutting it close. Documenting it would be near impossible.
Documenting it should be easy. Her move-out date is probably in the court records. Date of sale is also known. If she built it on land she already owned, the date it was certified for occupancy would make a good move-in date. If sale date - move-in date < 60 months, then Sec. 121 occupancy is move-out date - move-in date.
If move-out in less than 24 months was caused by certain factors (I do not remember if divorce/separation was one of them), then she would be eligible for a pro-rated portion of the $250,000 cap, which should handily exceed the profit. Taking a job farther away from the old home than from the new home is definitely one of the factors, I believe it had to be 60 miles farther.
For more info, consult the IRS publication on selling your home. Section 121(d)(3)(B) Property used by former spouse pursuant to divorce decree, etc. Solely for purposes of this section , an individual shall be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use of the property under a divorce or separation instrument (as defined in section 71(b)(2) ).So her qualified use may include that of her former spouse.
Regarding divorce, that is listed as a Specific event safe harbor per Reg. 1.121-3(e)(2)
Whatever the case may be, I'd suggest getting a good CPA to do the tax return for anyone in the year of divorce as income division and the splitting of tax attributes can be extremely complicated.
nycll said:The exemption doesn't require investing in a new home anymore.Indeed: the law changed back in 1997. A lot of people still seem to think it hasn't changed.
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