Capital Gains on home sold after divorce

[crdixonaz]

Hi, my ex-wife and I are selling our home and I am trying to understand what capital gains we may owe if any. We originally purchased the home for 252k back in 2017 and are selling it for 459k. Our proceeds will be about 113k total that we are splitting. The title company is issuing each of us a 1099-S. We both qualify for the the exemption since it was our primary residence and we both lived there for at least 2 out of the last 5 years.  We are filing separately for the 2024 tax year.  Do we each use 50% of the basis and 50% of the sale price and get the 250k exemption? It seems to me we both fall well under the 250k threshold for our share and should not owe any capital gains tax.  Any help would be appreciated.

[Opus 17]

I think you mean a 1099-S, which is for most routine home sales.  A 1099-C would be for a forgiven debt, like a short sale where the bank forgives the balance of the mortgage, and is more complicated.

Yes, if your divorce is final by December 31, 2024, so that you file single separately, each of you would report half the purchase price, half the selling price, half the gain, and you would both be covered by the exclusion. Because you will get a 1099-S, you do need to include the sale on your tax return, but no capital gains tax will be owed. 

[rjs]

I'm not sure what you mean by proceeds of $113,000. If you sell the home for $459,000 your proceeds are $459,000. Proceeds are the full selling price, not the amount of cash you walk away with. Are you subtracting the mortgage payoff in calculating "proceeds"? Paying off the mortgage is not taken into account in calculating proceeds or gain.

The potentially taxable amount is the capital gain, not the full proceeds. Your capital gain is the selling price, $459,000, minus the original purchase price, $252,000. So your capital gain is $459,000 - $252,000, which is $207,000. Paying off a mortgage does not affect the amount of capital gain. But you are still well under the $250,000 maximum exclusion for each of you.

[crdixonaz]

Thank you, yes the 113k is proceeds as the title company is calling it. I understand now that the pay off and what we take home is not relevant. Do you know if seller concessions can be deducted at all as we paid about 14k in addition to the realtor commissions and other closing costs. Its about 41k all together.

[rjs]

Yes, the real estate agent's commission and certain other selling expenses can be added to the basis, so they reduce the gain. If you already qualify to exclude the entire gain, the selling expenses are not going to make any difference because you already have no taxable gain. But you should include the selling expenses when reporting the sale, just for the record.

[Opus 17]

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@crdixonaz wrote:

Thank you, yes the 113k is proceeds as the title company is calling it. I understand now that the pay off and what we take home is not relevant. Do you know if seller concessions can be deducted at all as we paid about 14k in addition to the realtor commissions and other closing costs. Its about 41k all together.

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Adjustments to basis are described in publication 523 on page 8.

https://www.irs.gov/pub/irs-pdf/p523.pdf

Briefly, you can subtract fees and legal costs as long as they have nothing to do with financing (in other words, whatever fees you would pay if you were selling for cash and had no mortgage–so if there is a legal fee for recording the mortgage as closed, that is not allowed).

Most "seller concessions" are treated as a reduction in the selling price.  If the list price is $459,000 but you agree to pay $10,000 of the buyer's closing costs, then the sales price is really $449,000.  Calling it $459,000 is a bit of real estate trickery to keep market prices higher and get the agent a bigger commission.  Other costs like the agent commission are allowed as adjustments to the selling price.