Separated couple home sale with only one spouse's name on the title in California

[Leo N]

Separated couple:

1. Has a court order specifying how primary residence sale proceeds will be split

2. Both filing as single

3. Only one spouse's name is on the title, so net proceeds from the home sale initially go to that spouse's bank account

Question:

What home sale amount should each spouse specify in their respective tax returns and where? Should any supporting documentation be sent to IRS and how?

[Mike9241]

Property and debt that are acquired between the date of the marriage and the date when you officially separated are considered to be community property in California. so if CP each would report sale of 1/2 the property.

for purposes of the home sale exclusion only one needs to be on title (own it for two years) but each must use it as their primary residence for any 2 years before sale. However, under the tax code allows the spouse who does not actually use the home as a residence to meet the use test during any period that 1) the nonoccupant spouse owns the home and 2) the occupant spouse or former spouse is allowed to use the nome uder a divorce or separation agreement and uses the the home as their main home

 I also question filing as single since legal separation is not the same as divorce. If you do not live apart for the last 6 months of the tax year the filing status choices are joint or married filing separately. The same would be true unless living apart for the last six months of the tax year and the taxpayer paid more than 1/2 the cost of keeping up a home for themself and their child who lived with the taxpayer for more than 6 months. 

[NCperson]

@Leo N as you are still legally married, there is no option for either of you to file SINGLE under any circumstance.

assuming no children, then you both either file MFS or MFJ.

if children, it's more complicated.  The non-custodial parent files MFJ or MFS. The custodial parent files MFJ, MFS or HOH, depending on the circumstances.  

[Leo N]

TurboTax suggested Single as the best choice, and it was used for the 2024 return with no problems. Also, this is the info from IRS (which makes no distinction between a divorce and a separation):

"If you're legally separated or divorced at the end of the year
You must file as single for that tax year unless you're eligible to file as head of household or you remarry by the end of the year."

(https://www.irs.gov/individuals/fi[product key removed]-divorce-or-separation#:~:text=If%20you're%20....)

My question was about what gain each spouse should report and where/how. Is it the actual amount each party received (it's not 1/2 of the net house sale proceeds per the Marital Separation Agreement) minus 1/2 of the original purchase price of the house? 

[Leo N]

This is the info from IRS (which makes no distinction between a divorce and a separation):

"If you're legally separated or divorced at the end of the year
You must file as single for that tax year unless you're eligible to file as head of household or you remarry by the end of the year."

(https://www.irs.gov/individuals/fi[product key removed]-divorce-or-separation#:~:text=If%20you're%20....)

[NCperson]

@Leo N very few people are "legally" separated.  It would be quite unusual. 

While you may have a separation agreement with your spouse that is legally binding, only if the Judge signs off on it would you be "legally" separated.  That doesn't normally occur.  Unless that step occurs, you are still legally married in the eyes of the IRS and filing SINGLE is not an option. 

The IRS does make a huge distinction between "legally separated and divorced".  

if you are LEGALLY separated or divorced, then you file SINGLE .  If you are simply SEPARATED, then you file either MFJ or MFS.

There are options to file HOH when there are children involved, but since you have not indicated that is the case, let's leave that aspect lie. 

Let's look at it this way.  As of 12/31/24, could you legally re-marry? Ask your attorney😉. 

[Mike9241]

@Leo N 

IRS reg on community income reporting

§ 1.66-1 Treatment of community income.
(a) In general. Married individuals domiciled in a community property state who do not elect to file a joint individual Federal income tax return under section 6013 generally must report half of the total community income earned by the spouses during the taxable year except at times when one of the following exceptions applies:

(1) The spouses live apart and meet the qualifications of § 1.66-2.

(2) The Secretary denies a spouse the Federal income tax benefits resulting from community property law under § 1.66-3, because that spouse acted as if solely entitled to the income and failed to notify his or her spouse of the nature and amount of the income prior to the due date for the filing of his or her spouse's return.

(3) A requesting spouse qualifies for traditional relief from the Federal income tax liability resulting from the operation of community property law under § 1.66-4(a).

(4) A requesting spouse qualifies for equitable relief from the Federal income tax liability resulting from the operation of community property law under § 1.66-4(b).

(b) Applicability.

(1) The rules of this section apply only to community income, as defined by state law. The rules of this section do not apply to income that is not community income. Thus, the rules of this section do not apply to income from property that was formerly community property, but in accordance with state law, has ceased to be community property, becoming, e.g., separate property or property held by joint tenancy or tenancy in common.

so the question of who reports the sale depends on whether the property was separate property or community property when sold. Ask your lawyer

per the iRS

If you're separated but not legally separated or divorced at the end of the year
The IRS considers you married for filing purposes until you get a final decree of divorce or separate maintenance.

If you're legally separated or divorced at the end of the year
You must file as single for that tax year unless you're eligible to file as head of household or you remarry by the end of the yea

[Leo N]

Mike9241:

1. Legally separated - yes.

2. Community property - yes (California law).

3. Portion of net proceeds from the home sale that each party receives is stipulated in the Court Order (Marital Separation Agreement).

The question at this point is whether TurboTax is flexible enough to ask right questions about home purchase price and proceeds for each spouse or a tax pro will be needed for 2025 taxes.

[Leo N]

NCperson:

1. Legal separation is actually quite common. Here is the info re legal separation for California:

https://selfhelp.courts.ca.gov/divorce-california/legal-separation

2. You can only re-marry if you are legally divorced. You are still required to file as Single if you are legally separated.

My original question was about a legally separated couple (sorry about omitting the word "legal"):

- What to report (actual portion of net proceeds from the house sale that each party got minus adjusted base of the property divided by 2)?

- Where to report it (what form, etc.)?

- Should any proof be sent to IRS (Court Judgement/MSA, etc.)?

- Is TurboTax flexible enough to adjust for all these details (including only one spouse's name on the property title) or professional tax preparer should be used in 2025? (Looks like the latter at this point).