Capital Gains Deduction

[anahd]

Purchased home new in 1973 and I have paid all the mortgage (plus associated prop taxes / property insurance) which was finally paid off in 2003.  Husband voluntarily moved out 12/2001, filing for divorce in Feb 2002 stating DOS as 12/21/01.  In the process of removing his possessions during that 3 month interim when I stated there would be conditions he commented that he felt since I'd paid for the house if he let me have it he wouldn't have to 'do' or come up with anything else.  Now, however, after 5 years, and he has complied with no attempt to get his name off the title (yes Calif, h/w j/t) he is insisting on a 50/50 split at current appraised value - which is almost triple of value at DOS.  Now my question involves capital gains, if I buy out his interest (he has indicated around $300K would be acceptable) :  1 - he hasn't lived there for one day in 5 years, but I have and continue to live there, expecting him to sign off; 2 - I would be giving him $300K for a house which originally cost $45K; 3 - could he be liable for capital gains, and, if he is and exercises the deduction, how am I impacted?  It is my understanding that the capital gains deduction can only be used once in a lifetime and there is only one deduction per couple.  For this situation, for the purpose of definition, when do we cease to be identified as a couple?  If I later decide to sell the house, am I precluded from exercising the capital gains deduction for myself?  Thanks.

[Lee Borden]

You're remembering the old rule on capital gains, which has now changed. Under the present rules, either of you can exclude up to $250,000 of gain on the sale of the residence where you have lived for any two of the last five years, and you can do it as often as every two years. Nice, huh? Congress set out to make the issue of capital gains on the sale of your house no longer a concern for most taxpayers, and I believe they succeeded. Your husband's decision to claim an exclusion from capital gains on his separate return will have no impact on your ability to claim an exclusion on your separate return later.

You haven't asked about whether it's a good idea to pay him 1/2 the value for an asset that has probably peaked in value and that has done most of its appreciating after your separation, so I won't comment on that. Well, yes I will. It sounds like a mistake to me. Talk to a divorce lawyer in CA to check me out on this, but I have a layperson's impression that community property value is measured as of the date of separation, not as of the date of divorce.

[Jade]

Purchased home new in 1973 and I have paid all the mortgage (plus associated prop taxes / property insurance) which was finally paid off in 2003.  Husband voluntarily moved out 12/2001, filing for divorce in Feb 2002 stating DOS as 12/21/01.  In the process of removing his possessions during that 3 month interim when I stated there would be conditions he commented that he felt since I'd paid for the house if he let me have it he wouldn't have to 'do' or come up with anything else.  Now, however, after 5 years, and he has complied with no attempt to get his name off the title (yes Calif, h/w j/t) he is insisting on a 50/50 split at current appraised value - which is almost triple of value at DOS.  Now my question involves capital gains, if I buy out his interest (he has indicated around $300K would be acceptable) :  1 - he hasn't lived there for one day in 5 years, but I have and continue to live there, expecting him to sign off; 2 - I would be giving him $300K for a house which originally cost $45K; 3 - could he be liable for capital gains, and, if he is and exercises the deduction, how am I impacted?  It is my understanding that the capital gains deduction can only be used once in a lifetime and there is only one deduction per couple.  For this situation, for the purpose of definition, when do we cease to be identified as a couple?  If I later decide to sell the house, am I precluded from exercising the capital gains deduction for myself?  Thanks.

I would talk to an attorney, you may only be responsible for the market value at the time of your divorce.  BTW, if your ex has not lived in the house in the last 2 years, he is not going to be able to claim the exemption. 

[livealittle]

Jade, that's not completely accurate.  The rule is 2 years of the last 5 for primary residence....., but she should see a tax accountant who can advise her on tax consequences of the divorce settlement and home sale.  You can read all about it here....

http://www.irs.gov/taxtopics/tc701.html


this is the pertinent portion....

To be eligible for an exclusion, your home must have been owned by you and used as your main home for a period of at least two years out of the five years prior to its sale or exchange. The required two years of ownership and use during the five–year period ending on the date of sale do not have to be continuous. You can meet the ownership and the use tests during different two year periods.