How to split community property stock sales when MFS on Form 8949?

[positiveidea]

Spouse and I live in a community property state and are filing "married filing separately".  We have a community property taxable brokerage account with stock sales in 2024.  How does Turbotax 2024 Desktop want the cost basis, sale proceeds, and Form 8949 columns f and g ("adjustment, if any, to gain or loss: code, amount") entered?

Option A:

On each MFS return enter 1/2 cost basis and 1/2 sale proceeds.

Option B:

On each MFS return enter full cost basis and full sale proceeds.  Enter Code N (Nominee) in column f and -1/2 the gain amount in column g.

Option C:

On each MFS return enter full cost basis and full sale proceeds.  Enter Code O (Other) in column f and -1/2 the gain amount in column g.

Option D: None of these...do something else?

Do we make these adjustments directly in the form viewer for the Form(s) 8949 as an override?  Or is there some other way to make these adjustments?

[BillM223]

I would do option A - enter half of the sale and basis.

At the same time, document what you did (entire sale, basis, any expenses, etc.) and make a copy of the 1099-B (or whatever you have) and keep these in your tax file in case anyone asks (I doubt they will).

Keep it simple while still getting the right answer.

[positiveidea]

Can you provide any pointers to specific IRS guidance about your recommendation to use option A?

I’m thinking the answer is either B or C based on the wording of IRS Pub 555. Page 10 says “On the appropriate lines of your separate return, list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.).” but doesn’t mention basis or gains/loss.  

Elsewhere in Pub 555 it says “

Gains and losses.

Gains and losses are classified as separate or community depending on how the property is held. For example, a loss on separate property, such as stock held separately, is a separate loss. On the other hand, a loss on community property, such as a casualty loss to your home held as community property, is a community loss. See Pub. 544, Sales and Other Dispositions of Assets, for information on gains and losses.”

Looking in Pub 544 doesn’t include the term “community property” anywhere.  

[AmyC]

Yes. You have the right Pub 555. The first line under Community or Separate Property and Income states: If you file a federal tax return separately from your spouse, you must report half of all community income and all of your separate income.

The IRS also wants it simple, half the income, they can understand. When you start adding all the other stuff, they have to determine is there a nominee involved or some other situation.

[positiveidea]

AmyC, not clear which of the option A-D you are recommending. 

From my perspective, “cost basis” ’is not the same thing as “income” and since the IRS asked for half the “income” that’s why I was leaning towards option B or C. In other words, “gain” is certainly something I can think of as income. 

I don’t believe a “nominee” is the same as a community property spouse (and from your response I think you agree) so that would lead us to use Option C (enter Code O for other)? Do you agree?

[AmyC]

I think options A and C will work. There isn't any hard guidance so you have to go with what you feel you can explain, if asked. I would pick A since it feels more straightforward to me. Best wishes!