Capital gains / divorce settlement

[Staylor2023]

• Hi - I have a question about capital gains. My divorce was finalized in 2019 with the MSA agreement stating that the the net proceeds from the sale of the home will be divided 50/50. My ex husband is the only name on the title . His accountant is telling him that he can only use a single owner exemption of $250,000 on the capital gains. My question is why can we not use his $250000 and my $250000? The sale was part of our divorce settlement. We had a defined date of sale. He could not sell the house until our kids were 18. Putting us at a sale of august 2023. He now wants me to pay half of his tax liability. Thoughts? 

[NCperson]

To be eligible for the $250,000 exclusion, you must have LIVED in and OWNED the home for 2 of the past 5 years.  While he meets that requirement, you wouldn't, so you wouldn't have a $250,000 exclusion.  

(I am assuming he lived in the home for 2 of the last 5 years, since you state the accountant indicated he was eligible for the $250,000 exclusion)

Suggest talking to your lawyer to see whether your are responsible for any capital gains tax liability from the home sale. 

[Staylor2023]

Thank you for your response. I lived in the home as my primary residence with our children. So you are saying that because I wasn’t on the title that doesn’t make me an owner? Even though we have a contract to divide the net sale 50/50. If he had placed me on the deed he could have avoided the tax. 

Has anyone ever heard of a Nominee 1099s form? Could my ex use this form to file to avoid the tax. 

I am working with my attorney who believes that I am not responsible for the tax. We will need to resolve the matter in court. 

[NCperson]

@Staylor2023 as I stated, the rule is that to be elgible for the $250,000 exclusion, you must OWN and RESIDE in the home for 2 of the past 5 years.  

Now that I understand the situation, 

• even though you meet the residence requirement, you don't meet the ownership requirement.
• Your ex-husband meets the ownership requirement and meets the residence requirement (even if he did not live in the home) due meeting a special rule in divorce situations.   See page 4 - bottom left.  (this is why I suspect the attorney stated your ex was eligible for the $250,000)

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

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. 

<<If he had placed me on the deed he could have avoided the tax. >>

yes, because you both would have satisfied the 2 of 5 rule for ownership AND residency. 

And in case you think about it, putting your name on the deed now, before the home sells, won't work, because you could not satisfy 2 years of ownership over the past 5 years :( 

[Mike9241]

 He now wants me to pay half of his tax liability. Thoughts?  this is a legal question. Does the MSA say anything in this regard. from a tax standpoint he's responsible for 100% of any tax on the gain. 

[Staylor2023]

The wording in the MSA does not reference capital gains . This is the wording in the MSA.

”the net proceeds shall be divided on a 50%-50% basis between the parties. 

the net proceeds shall be divided on a 50%-50% basis between the parties.

My ex is demanding that I pay half the tax. And my attorney is saying that I am not required to pay the tax. So we will need to go to court. A judge will have to read the language of the agreement and weigh-in as to whether or not he/she feels capital gains taxes should be deducted from the net proceeds.

[NCperson]

@Staylor2023 how much is the tax versus the cost of the attorney? 

take (the capital gain less $250,000) times 15% (and could be as high as 23.8%, depending on your ex's income) and then take half of that - THAT would be your half in a worst case scenario.  How does that compare to the legal cost of fighting this in court or otherwise settling it?