Divorce and capital gains

[jeanjrue]

I'm filing my own taxes this year.  Divorced in Feb of 23' and the house sold in April 23'.  We did not fulfill the 2 year lived in requirement for capital gains exclusion.  My question is under the section in Turbo tax when it asks for the house info.  I put the information found on the mortgage form and the 1099-S and then exclude the work done on the home.  I am assuming that my ex-wife is doing the same.  Is this going to cause an issue with filing?  I did claim 46% of the property tax, which was decided in the divorce decree but I didn't know if I was supposed to claim 46% of the house and the improvements as well.  Does anyone know how this is done?  

[DianeW777]

Yes, we know how it's done, and it depends on the divorce agreement.  Either the divorce agreement or you and your former spouse must arrive at an agreement about whether you are reporting all of the sale or 46% of the sale, assuming 54% would be reported by your former spouse.

If you are required to report 46% of the sale of the home, then you would first determine the full cost basis which is original purchase price, purchase expenses and any capital improvements cost.  Once you have that figure you would multiply that by your 46%. Next you would use your percentage times the selling price and selling expenses.

• 46% of selling price less 46% of selling expenses minus 46% of cost = taxable gain for you.

If the 1099-S was received in only one name or social security number (SSN) there's no real concern because you have your agreement about how it will be handled.  Keep all the papers with your tax return should you need them later.

[Hal_Al]

There are exceptions to the 2 year rule, for the exclusion of capital gains on the sale of your primary residence.  One exception is for "unforeseen circumstance". Divorce almost always meets this exception.  You are allowed a reduced maximum exclusion. For most people, this means they get the full amount, unless it's significantly close to the $250K.  Using an example: you lived in the house one year (50% of 2 years).  You can exclude up to $125,000 (50% of 250K) of your share of the gain. 

Reference: https://www.journalofaccountancy.com/issues/2009/nov/20091783.html

[Opus 17]

Generally, the IRS will assume each co-owner owns a 50% share, but that can be rebutted if you have documents (say, divorce order that the division is 46/54 instead of 50/50).  If you file a return where the 1099-S does not match what you report, you might get a letter from the IRS but you can easily respond to that.

And, be aware that you might qualify to exclude some of the gain under the "unforeseen circumstances rule."  See publication 523 on page 6.

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

[jeanjrue]

Thank you.  Just so I am thinking correctly.  The full cost basis would be 621,599 (full price of the home) 7664 (purchase expenses) and 41,500 (home improvements) = 670,763 x 46% =  308,551

The selling price was 705000 (324,300 is 46%), expenses were 44,437 (20,441 is 46%) and you said 46% of the cost.  Is that the 308,551 above?

If that's the case, it would be -28,688.

If all of this is correct, then I am wondering where and how I input this into the turbo tax premier system.

thanks so much for your help!  I was really at a loss ( 🙂 )

[DianeW777]

Yes, you are using the correct formula for both the cost basis and the selling price/selling expenses.  Follow the screen instructions to see if you might qualify for at least a partial exclusion due to the divorce. The second link will walk you through the TurboTax Premier steps.

• Is the money I made selling my home taxable?
• Where do I enter Form 1099-S?

@jeanjrue 

[jeanjrue]

Thank you.  So, it's still asking for accurate numbers for the purchase and sale.  Should I keep them at that?  Where does the 46% come in?  To me, it looks like I'm claiming the full purchase and sale on my taxes and if my ex-spouse does the same, won't that be a flag for the IRS?

[Opus 17]

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@jeanjrue wrote:

Thank you.  So, it's still asking for accurate numbers for the purchase and sale.  Should I keep them at that?  Where does the 46% come in?  To me, it looks like I'm claiming the full purchase and sale on my taxes and if my ex-spouse does the same, won't that be a flag for the IRS?

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-28,688 seems to be wrong, my math comes out different.

There are a couple of ways you could do this.

You have a loss on the property, and losses on personal property are not deductible.  So you could report the entire 1099-S as your sales proceeds, report the entire basis and adjustments, and show a loss of $10,200.  It's not deductible or taxable, it just gets reported.  Your ex could do exactly the same thing, and owe no tax and get no deduction.  The IRS won't care (and probably won't even notice) that the full 1099-S was reported twice.  (This is what I did after my ex sold our house, although instead of a loss I had a small gain that was covered by the exclusion.)

Or, don't enter the 1099-S at all in Turbotax.  Report the sale of your home using selling price of $324,300, selling expenses of $20,441, and an adjusted cost basis of $308,551, for a loss of $4692.   The IRS might send a letter asking why there was a 1099-S for $705,000 if you only reported $324,300.  You would respond to that letter by telling the IRS that the home was sold in a divorce, you received a 46% share and reported 46% of the basis and the loss.  Give them your ex's name and address and explain that they are responsible for the other 54%.  You might also include copies of the relevant pages from your divorce (the cover page, signature page, and any internal pages where the house is discussed).