Divorce and Sec 121 exclusion

[cjlcpa]

I think I already know my answer, but would love some confirmation/feedback. Thanks in advance.

Client divorced in May 2015, sold home of 28 years in October 2015. Ex lived there with her for 13 years. He was removed from title as part of the divorce and prior to her selling the home. She sold with a gain of approximately $400k. Since he did not remain on title, the sale was in her name only, she will have a taxable gain on this of $150k as a single filer.

Am I correct? This could have all been avoided if he had retained ownership until sale and they would have each had a $250k exclusion.

Of course, she/they did not consult me before doing all this!

Carrie

[DonB]

I think I already know my answer, but would love some confirmation/feedback. Thanks in advance.

Client divorced in May 2015, sold home of 28 years in October 2015. Ex lived there with her for 13 years. He was removed from title as part of the divorce and prior to her selling the home. She sold with a gain of approximately $400k. Since he did not remain on title, the sale was in her name only, she will have a taxable gain on this of $150k as a single filer.

Am I correct? This could have all been avoided if he had retained ownership until sale and they would have each had a $250k exclusion.

Of course, she/they did not consult me before doing all this!

Carrie

Did she buy his half and possibly increase the basis? She must have given up something to get the house.

[cjlcpa]

Did she buy his half and possibly increase the basis? She must have given up something to get the house.

I don't have the HUD sale doc with me now, but I believe he did get a portion of the proceeds from the sale. I didn't think that gave her basis though, does it?

[taxea]

Well! This was certainly BAD planning. You need to read the divorce agreement. It may give you insight as to why the sale was handled this way. Perhaps the spouses made an informal agreement that the house would be put in her name for the ease of selling and other would get part of the proceeds. Was the divorce final before or after the sale. It may be possible that the sale and 121 should be split between them.

[Roland Slugg]

I believe he did get a portion of the proceeds from the sale. I didn't think that gave her basis though, does it?

No, it doesn't give the W any additional basis, but it may mean that she doesn't have to report the entire selling price on her own return. If the H got some of the proceeds, then it would seem that he participated in the sale. If that's true, then a portion of the sale should be reported on his return, and if it is, then he will be entitled to his own §121 exclusion of up to $250k.

You definitely need to get the facts straight and, if possible, see the divorce agreement, as others have suggested.

[cjlcpa]

Thank you all for your input. The divorce was definitely final before the sale. Divorce in May 2015, sale in November 2015. I will get a look at the divorce decree to see if that lends any insight.

[Lion]

Listen to Roland. If the sale is "incident to a divorce" then only one spouse has to remain living there as her/his primary residence to satisfy the ownership & residence requirements of the 121 exclusion. But in your case, the ownership requirement is the issue. Read the divorce decree, especially the property settlement part. And, read Section 121.

She does NOT get any extra basis in the house due to a property settlement. The basis of the two of them before the settlement is her basis after the settlement. So, I'd really explore whether he has ownership interest or not. And if not, then have her revisit capital improvements they made over the years.