Hello and thank you for your question.
According to IRC section 1041, no gain or loss is recognized on a
transfer of property between spouses in a divorce.
Divorce Tax Implications
http://www.findarticles.com/cf_dls/m6280/1_188/55292958/p1/article.jhtml
The IRS publication that covers this and related issues agrees
Divorced or Separated Individuals
http://www.irs.gov/pub/irs-pdf/p504.pdf
(Page 18)
So if husband (for example) wants to sell his half-interest in the
property to wife, the proper price would be for her to pay him 150,000
and to arrange for the bank to release him from the mortgage. And the
transaction will be tax-free.
It is important that husband be released from the mortgage, since he
deserves to know that if the wife fails to make a payment, he won't be
in a position to be sued by the bank. If the bank refuses to take the
husband's name off the mortgage note, then as part of the deal wife
should be willing to refinance the mortgage under her sole name--in
other words, borrow funds to pay off the old mortgage (and in this
case it would be fair for husband to pay 1/2 of the closing costs of
the refinancing).
Alternatively (if the bank refuses to take the husband's name off the
mortgage note), husband and wife could agree that rather than
refinance in this circumstance, the wife could sign a paper
indemnifying (holding harmless) the husband from any liability he
might have on the mortgage. But that won't stop the bank from suing
him--it only gives him the right to sue the wife to recover his costs
and expenses if the bank sues him for her nonpayment.
Note that since the husband's sale of his 1/2 interest to the wife is
a tax-free sale, "the tax basis - generally the original cost of the
property, plus some adjustments - is transferred to the new owner of
the property. This means that the individual who received the property
as part of the divorce settlement must use the property's original
value - not the value of the property at the time of the transfer - in
determining liability for capital gains tax when the property is
eventually sold. If you may be receiving appreciated property as part
of a divorce settlement, be sure to consider the tax impact of selling
that property before you agree to take possession of it."
Think taxes when getting a divorce
http://latc.com/1995/07/03/special_sect/money1.html
But that shouldn't change the economics of the deal (in other words,
$150,000 is still the right price), because when the wife eventually
sells the house, she can expect to avoid paying tax on all or most of
her gain anyway. Currently there is potential gain of 800,000 -
650,000 = 150,000 and the tax law will make a sale at that price
tax-free for the wife regardless of her age when she sells:
"Under the new law, generally effective for property sales after May
6, 1997, up to $250,000 of the gain from the sale of a single person's
principal residence is tax-free. ... And, for certain married couples
filing a joint tax return [this would apply if she were to remarry],
the amount of tax-free gain doubles to $500,000."
Home Sale Tax Exclusions
http://www.fool.com/school/taxes/1998/taxes980212.htm
What tax mistakes do people make in this circumstance? Mainly, they
forget to protect the seller against possible liability on the
mortgage, or they close the sale of the half interest from one spouse
to the other more than a year after the divorce takes effect, which
loses the section 1041 protection unless the sale was made a term of
their separation agreement
"The transfers are presumed to be incident to the divorce in two circumstances
1) Transfer occurs not more than one year after the date on which the
marriage ceases, or
2) Transfer is pursuant to a divorce or separation instrument and
occurs not more than six years after the date on which the marriage
ceases."
Taxes & Divorce: Property Transfers Incident to a Divorce
http://www.divorcesource.com/info/taxes/transfers.shtml
Search terms used:
irs divorce equitable property
sale of personal residence
1041 incident divorce
Thanks again for bringing us your question. If you find any of the
above unclear, please request clarification. I would appreciate it if
you would hold off on rating my answer until I have a chance to reply.
Sincerely,
Richard-ga |
