Capital gains married filing separately

[oceans721]

My ex-wife and I, sold our primary residence after our divorce, which we still owned jointly, and want to use our 1-time capital gain exemption.  We qualify per the listed criteria.  I've read IRS 2020 Publication 523 detailing the worksheet for Exclusion of Gain on the Sale of a Home, but can't find instructions on how one enters values for Sale Price, Total Basis,  and Gain if one is filing single, as a divorcee.  Do I enter 50% of these values, and my ex-wife enters them at 50% as well, so we each get our $250K exemption?  

[DJS]

Unmarried people who jointly own a home and separately meet the tests described below can each exclude up to $250,000. To claim the whole exclusion, you must have owned and lived in your home as your principal residence an aggregate of at least two of the five years before the sale (this is called the ownership and use test). You can claim the exclusion once every two years.

As joint owners you each claim 1/2 the cost basis, 1/2 the sales price, and 1/2 the gain. 

Even if you haven't lived in your home a total of two years out of the last five, you're still eligible for a partial exclusion of capital gains if you sold because of a change in your employment, or because your doctor recommended the move for your health, of if you're selling it during a divorce or due to other unforeseen circumstances such as a death in the family or multiple births. In such a case, you'd get a portion of the exclusion, based on the portion of the two-year period you lived there. To calculate it, take the number of months you lived there before the sale and divide it by 24.

Note: 

Your gain is actually your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments.)

Deductible closing costs include points or prepaid interest on your mortgage and your share of the prorated property taxes.

Examples of selling costs include real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees.

[oceans721]

Thanks for your prompt and concise response.  Your answer was very helpful to my circumstances, and I looked all over IRS to find what you provided.  Thanks so much for your assistance.  

[DJS]

You’re welcome. 

[msosso5]

"In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return."

My wife and I live in Australia, a common law (not community property) country.  I am a US citizen, and she is (a USA) Non-resident Alien (NRA).  She never files a USA tax return (only an Australian return); I always file an Australian return, and a USA 1040, "Married, Filing Separately".

Over time, my wife has accumulated (almost) all of our assets (except my wallet 🙂 ) in her name only.  (I am the perfect spouse.)  This causes the related income to be only taxed by one tax regime (Australia) and not two (Australia & USA).  (For assets I hold, it's like walking through a two mine fields at the same time.  (If I were on my death bead, I might prefer that.))

Enough silliness:

We recently opened a joint bank account, and then opened a related joint share trading account.  We agreed that  all income and gains or losses would accrue to the individual who provided the funds.

My wife then transferred some of her Australian dollars into the joint bank account, and she then bought a small parcel of Australian stocks.  A dividend was received and deposited it into the joint account.  She then sold the little stock parcel and experienced as small loss ($A 20 or $US 15).

BOTH Australia and the USA allow for bank (and bond) interest, and dividend payments, to be attributed to the individual funding the account. 

I have obtained a private ruling from the Australian Tax Office indicating that gains or losses from shares can also be attributed to the single individual who provided the funds.

For US tax purposes, I have been unable to find if capital gains/losses can also be attributed in the same way,

and have prepared (but not sent) a Determination Letter.

Your comment (reproduced above) was made from the perspective of the readers being wholly within the USA, so might not  apply for individuals outside the country.

Can you point to a source which discusses the splitting of capital gains and losses further?  I'd like to be able to put the best argument forward to the IRS in my DL.

[msosso5]

Ok, I am on my way to answering my own question.

I read through this blog and note that a split cannot occur just because it will lower the tax burden.

This is very dangerous with a Determination Letter request where the question is about a

single capital LOSS, because that the IRS would allow me to apportion that (entirely) to

my NRA spouse.

The real issue is what happens when there is a GAIN (in $US terms).  So we need to reopen the joint accounts and buy something (and get a GAIN).

Our purpose is solely to avoid Probate if the spouse predeceases me (through the mechanism of joint-ownership of the stock)--the NRA spouse (who is supplying the funds) already does not pay USA taxes on the gain related to the sale of a non-USA security. 

But the IRS may not be able to rule in my favor, even though this is prudent estate planning.

[Mike9241]

you do have another option. the are accounting and law firms in your country which have expertise in taxation between the two countries.  can't say what the cost would be 

and a DL might not be correct thing to file

from 

https://www.irs.gov/irb/2021-01_IRB 

.03 A “determination letter” is a written determination issued by a Director that applies the principles and precedents previously announced by the Service to a specific set of facts. It is issued only when a determination can be made based on clearly established rules in a statute, a tax treaty, the regulations, a conclusion in a revenue ruling, or an opinion or court decision that represents the position of the Service.

[Mike9241]

not sure a DL is appropriate.

from https://www.irs.gov/irb/2021-01_IRB 

.03 A “determination letter” is a written determination issued by a Director that applies the principles and precedents previously announced by the Service to a specific set of facts. It is issued only when a determination can be made based on clearly established rules in a statute, a tax treaty, the regulations, a conclusion in a revenue ruling, or an opinion or court decision that represents the position of the Service.

.01 A “letter ruling” is a written determination issued to a taxpayer by an Associate office in response to the taxpayer’s written inquiry, filed prior to the filing of returns or reports that are required by the tax laws, about its status for tax purposes or the tax effects of its acts or transactions. A letter ruling interprets the tax laws and applies them to the taxpayer’s specific set of facts. A letter ruling is issued when appropriate in the interest of sound tax administration. One type of letter ruling is an Associate office’s response granting or denying a request for a change in a taxpayer’s method of accounting or accounting period. Once issued, a letter ruling may be revoked or modified for a number of reasons. See section 11 of this revenue procedure. A letter ruling may be issued with a closing agreement, however, and a closing agreement is final unless fraud, malfeasance, or misrepresentation of a material fact can be shown. See section 2.02 of this revenue procedure.

Letter rulings are subject to exchange of information under U.S. tax treaties or tax information exchange agreements in accordance with the terms of such treaties and agreements (including terms regarding relevancy, confidentiality, and the protection of trade secrets).

there are law firms and accounting firms in your country that have expertise in the taxation between the two countries

not sure what the cost for an IRS ruling would be compared to the cost of using a professional firm.

[msosso5]

I really appreciate your responses.

I will try to get the text you mentioned and see if there are any references to the process the IRS uses to determine if the avoidance of probate is allowable.  This information might then allow a Determination Letter (costing approximately $300)--I want to avoid a Letter Ruling (costing approximately $3000) unless absolutely necessary.

I will also search for relevant prior letter rulings.

[abbie12]

how do you handle capital gains on jointly held property when filing separately?

[DJS]

You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.

If you file a federal tax return separately from your spouse and you live in a community property state, you must report half of all community income and all of your separate income. Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes.  Refer to https://www.irs.gov/publications/p555#en_US_201901_publink1000168769

Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.

Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.

In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return. You may allocate joint gains based in these states based on the proportions of income, or any other reasonable method. 

Reply

[#12]

You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.

If you file a federal tax return separately from your spouse and you live in a community property state, you must report half of all community income and all of your separate income. Generally, the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes.  Refer to https://www.irs.gov/publications/p555#en_US_201901_publink1000168769

Nine states have community property laws. Married couples in these states typically need Form 8958 if they file separate rather than joint tax returns:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

On Form 8958, a couple lists individual sources of income for each of them, such as employers, banks that pay interest, stocks that pay dividends, capital gains and tax refunds. The couple reports the total amount received from each source, then allocates a portion of the total to each person.

Form 8958 essentially reconciles the difference between what employers (and other income sources) have reported to the IRS and what the spouses will be reporting on their federal tax returns. Both spouses must include a copy of the form with their tax return.

In other states gains on assets that are jointly held can be allocated any way you like, but gains on assets held in one name only must be reported on the owner's tax return. You may allocate joint gains based in these states based on the proportions of income, or any other reasonable method. 

[jackson1143]

Can one spouse file for capital gains if both parties received a 1099 for sale of a property ?

[DJS]

Can you explain the circumstances? Was this for the sale of a house or other real estate? Are you filing married but filing separately? 

If the assets that were sold were owned jointly (held in a joint account) you can allocate the capital gains any way you would like. If the assets sold were owned (the account titled in only one name) then that spouse must claim the gain or loss.