@dillingerwa wrote:
It was a joint property with my ex husband. In 2015 we divorced and he was awarded the property. My name however was never removed from the deed. Then in 2023 he fell behind on the payments so the courts made him sign over the house to me. I haven't rented it because it needed so much work. I am hoping it will be done in the next couple months to put on the market.
I still think this fits the rules in the first paragraph of the divorce rules in publication 523, even though the extended time frame makes it confusing.
If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if:
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You are a sole or joint owner, and
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Your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his or her main home.
From 2015 to 2023 you were a joint owner (name on the deed, condition 1) and your ex was allowed to use the home as their main residence (condition 2).
Beginning with the date of transfer to you, when you are sole owner and not using the home as your main home, starts the 3 year clock on the 5-year rule. What that means is that, you are considered by the divorce rule to own the home and use the home as your main residence, from the date of your marriage to the date your ex was forced out. After that date, you are no longer considered to use the home as your main home, meaning that as long as you sell within 3 years of the date of the transfer, you can exclude the first $250,000 of capital gains from tax, and any capital gains above that will be long term capital gains taxed at 15%.
When you report the sale, use the date your ex bought the house as the acquisition date. For purchase price, what Turbotax really wants to know is your adjusted cost basis. That is the original purchase price, plus the cost of any permanent improvements you or your ex made. A list of typical improvements is found in IRS publication 523 beginning on page 8. https://www.irs.gov/pub/irs-pdf/p523.pdf
Repairs, utilities and insurance are not deductible and do not adjust the cost basis. Mortgage interest you paid (but not the principal) can be deducted on schedule A, and property taxes that you paid (including any arrears) can also be deducted on schedule A, up to the $10,000 cap for all state and local taxes.
From your sales price, you can deduct certain costs of selling as adjustments (reductions) in the selling price, such as your real estate commission and maybe certain county or state taxes and fees, also discussed in publication 523. That will lower your taxable capital gains.
"Staging" is an allowable reduction in selling price (it is considered an advertising expense) but only so long as no changes are made to the house. Any changes or modifications are considered repairs and are not deductible and not adjustments to basis. This should mean that if you hire a company to haul away all the junk in the house, that is an allowable selling expense. If you hire a staging company and you rent some nice furniture for open house, that is also an allowable selling price that will reduce your capital gains. But if the company also cleans the carpets and paints the walls, that part of the staging expense is not an allowable adjustment because it changed the house. (Replacing the carpet is an improvement, see publication 523.)
