Federal/NJ Sale of home / Divorce / Questions on living in house

[kephxaz]

Hello, 

I am assisting my 88-year-old mother-in-law with filing her taxes this year.

Here is the situation: She jointly owned a primary home in the State of New Jersey for 50+ years with her now ex-husband (divorced 11/2017). After having to work through issues on the division of real property for 5 years, the house finally sold in December 2022 and she received her share of the home. 

Leading up to the divorce back in 2016, she moved in with her son in Arizona. Because she couldn't legally state that she was a resident of NJ at the time of sale, they had to withhold $4,500 in state tax in which her lawyer said she would get back once she files her taxes. 

So, I am working through the interview questions in Turbotax and it asks us to count how many months she resided in the home and to start counting from December 2017. Technically, the answer is zero, she lived with her son in AZ because the marriage was failing and they couldn't be under the same roof anymore. 

I believe these questions are trying to determine if the house was a rental, second home, etc. The answer is no it was not an investment property. Can I just answer 60 months? Her profits were under the $250k for a single person and if she answers 0 then the Feds want a piece of the pie.

I have a copy of her divorce decree and all the legal paperwork we had to file over 5 years battling for her share of the house. 

One last thing to mention is that her son claimed her as a dependent on his Federal and Arizona return for 3 or 4 years. Before the sale her only source of funds was her Social Security (like $700 a month). He will not claim her this year. 

We are just afraid that the IRS will see her information on his return from prior years (2017-2021) but then she is claiming to have lived in NJ for those 60 months (2017-2022) and there is a conflict of dates here. So either one or both of them will face an audit down the road. 

I hope I explained the situation well enough. Please let me know if you have any questions. 

Thank you.

Kevin

[Cynthiad66 · Accepted solution]

She still legally owned 50% of that home and it was her legal address, right?

However, to simplify the filing I would put that she lived in the house for those 60 months.    

Unlike children, parents don't have to live with you at least half of the year to be claimed as dependents – they can qualify no matter where they live. As long as you pay more than half their household expenses, your parent can live at another house, nursing home, or senior living facility.

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

[kephxaz]

Hi Cynthiad66: 

Thank you for your reply.

I clicked on the IRS publication you linked to and found my answer: 

Eligibility Step 5—Exceptions to the Eligibility Test

There are some exceptions to the Eligibility Test. If any of the following situations apply to you, read on to see if they may affect your qualification. If none of these situations apply, skip to Step 6.

• A separation or divorce occurred during the ownership of the home. See Separated or divorced taxpayers.

Separated or divorced taxpayers.

If you were separated or divorced prior to the sale of the home, you can treat the home as your residence if:

• You are a sole or joint owner, and

• 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.

I appreciate your help!

-Kevin