Bought house for $130k, divorced later, refinanced to remove ex and took out some cash, new mortgage $250. Sold for $440. Profit $170. Do I have to pay cap gains tax?

[cindeadlee]

If I do is the bank or someone supposed to provide me with a form stating what the gains are?

[Mike9241]

mortgages and refinancing have no effect on your gain.  your gain is the selling price of $440K less selling costs less your tax basis which would seem to be the sum of the purchase price and closing costs plus the cost of any capital improvements. the institution handling the closing will issue a 1099-S (on or before 1/31/2023) showing the full sales price. and that's what you'll have to use on your tax return.  if it's been your principal residence for at least 730 days during the period that starts 5 years before the sale you are entitled to exclude for federal purposes up to $250K of the gain. I'm assuming you haven't remarried)

[NCperson]

@cindeadlee = the profit is not $170k.  Appears you took the $440k selling price and subtracted the mortgage to get to the profit.  The mortgage balance has nothing to do with it. 

The profit is

the selling price of $440k,

less any selling expenses (for example, the commission),

less any improvements you made during the time you owned it,

less how much you paid for it ($170k - despite the divorce, the cost basis remains the same). 

From that result, you can exclude $250k as long as YOU lived in the home at least 2 of the past 5 year.

So $440k- $170k is $270k

As long as your selling expenses and any improvements you made to the house exceed $20k AND you lived in the home for 2 of the past 5 years, there is not going to be any capital gains tax. 

[SweetieJean]

Please consult your TT Live Expert.

[Critter-3]

Two more things to consider ... the costs to buy the home and when you "refinanced" the home to take the ex off the mortgage did you in fact "buy her out" of her 1/2 of the property.  If so that would increase your basis.  Talk to your LIVE expert. 

[NCperson]

@cindeadlee @Critter-3 

I assumed that the $170k was the amount the two purchased the property for prior to the divorce and the house transfered to the OP upon the divorce..... the refinance itself wouldn't affect the cost basis, it's whether the ownership interest ("buy her out") changed when a  refinance occured that can affect the cost basis. 

[Critter-3]

Correct ... but the property value could have gone up from the time they bought to the time of the divorce so there are other things to consider that have not been made clear in this thread.  Only thing for sure is the unpaid mortgage principle is not considered at all. 

[cindeadlee]

Yes value went up. In 2012 we paid $132k. At time of divorce in 2016 value was $220k. In 2021 I sold for $440k. Idaho housing market exploded. If it matters,  I didn't refinance At the divorce. I had to get a brand new mortgage to get him off the mortgage. So the new mortgage was 250K because I took some equity out. 

 Someone else said I would get a form for the capital gains. But the bank has never provided me anything which is why I'm confused about if I'm supposed to pay capital gains or not. I think I'm pretty close to being exempted because of the $250000 exemption and yes I did live in the house for 3 of the 5 years prior to the sale

[Critter-3]

The 1099-S for the sale of the home should be in the stack of closing papers you left the closing table with ... if you don't see it then contact the closing company/attorney and ask them for it.

[cindeadlee]

@NCperson It's amusing that you assume I'm male. LOL I bought HIM out. You're right it was a new mortgage not a refi. �

[cindeadlee]

@Critter-3  thank you! I will look for the form right now. 

[NCperson]

@cindeadlee 

again, the mortgage refinance has nothing to do with this; please put it to the side.

Form 1099-S should come from the Closing Attorney or who ever the settlement agent was.  It does not come from the Lender (Bank).  

When did you receive the legal ownership of other half of the home? presumably when you divorced?

Knowing the value of the house at the time you received that half from your ex may not matter, because you are so close to the $250,000 exception in any event.  

Assuming the house didn't appreciate at all by the time of the divorce: $440,000 less $130,000 = $310,000 but then there are closing costs from the sale to subtract (commission alone could have been 6%) and subtract any improvements during your ownership could get you below $250,000 without worrying about the market value of the home at the time of the divorce..  

[NCperson]

@cindeadlee - actually I didn't assume that... my posts were all gender neutral (I think!!!)..... 

"did you in fact "buy her out" of her 1/2 of the property. "  is what Critter-3 wrote initially and I just copied it to make a point 🙄

[Carl]

Bought house for $130k, divorced later, refinanced to remove ex and took out some cash, new mortgage $250. Sold for $440. Profit $170.

Just using your numbers and information alone with no other facts to work with, your profit/gain is $310k. The refi has nothing to do with the cost basis of the property. However, there is a difference between refinancing, and buying the ex out. A buyout changes the cost basis. But only for the half you purchased. The cash out adds another wrinkle into the equation also when it comes to deductible interest on SCH A.

As far as paying tax on the gain, that depends on when purchased, when sold, how long it was y our primary residence, and the "ex" may qualify for the capital gains tax exclusion on the half they sold to you assuming this was in fact a buy out.

Of course, the wrinkles aren't over yet if you live in a community property state. Potential complexity abounds here. Lesson I learned many moons ago; if it was easy, you did it wrong.