Avoiding tax on real property sale
My soon-to-be ex and I are selling our real property, is there a way that I can avoid capital gain taxes on these properties?
by Nancy Kearson, CPA
I'm going through a divorce. Both my wife and I have a primary residence with $100,000 in equity and a rental property with $300,000 in equity. We are going to sell both and split the profits. Is there a way that I avoid capital gain taxes on these properties?
The tax laws treat capital gains from sales of residences and investment real properties differently.
Determining capital gain taxes for the sale of any real property begins with the sale proceeds. Then you deduct the costs of sale, costs of improvements, your original purchase price and the related acquisition costs.
If you are selling your residence and you have lived there for two of the last five years and you have owned the property for two of the last five years you can each take a $250,000 exclusion on your half of the net sale proceeds. Any amount remaining after the exclusion would be taxed for capital gain.
However, if you are selling a rental property you will not have the benefit of the residence exclusion, and in addition you will need to recapture any depreciation previously deducted in calculating the capital gain.
If you transfer your interest in the rental property to your spouse, the transfer is recognized as a §1041 transfer of property between spouses incident to a divorce and is not a tax triggering event. However, if your spouse sells the property after the transfer, your spouse will still be liable for capital gains and any recapture of depreciation.
In calculating your deductible expenses relevant to a capital gain on a real property sale, you may wish to consider including the specific fees you paid your attorneys and accountants for consultation and analysis regarding the sale of the property.
Going through a divorce can be tough enough without the added burden of tax dilemmas. Sit down with your CPA to discuss your situation and how best to handle your finances to reduce your overall taxes.
Nancy A. Kearson is a Los Angeles-based forensic CPA who is accredited in Business Valuation. She can be reached at (310) 785-9614.
Can I get tax deductions for payments that benefit my ex?
Can I get tax deductions for payments that benefit my ex?
by Nancy Kearson, CPA
I am an "out-spouse" in a divorce situation opting for a deferred sale of the primary residence. My wife and children will live in the house, and I will rent nearby. Since I will be the sole income provider, and thereby either paying mortgage interest and property tax payments directly or indirectly (through support payments), am I entitled to the tax deduction for these items?
After your divorce, you can hold title to the property as unmarried people in equal interest with your ex-wife as joint tenants (subject to the right of survivorship) or as tenants in common. If you have a written agreement with your ex-wife that you must pay all of the mortgage payments and property taxes here's what you can do.
As joint tenants:
- You can take an itemized deduction for one-half of the mortgage interest, and your ex-wife can take the other half as an itemized deduction.
- You can deduct half of the mortgage interest and one-half of the mortgage principal payment as alimony (and your ex-wife must report these payments as alimony).
- You can take all of the real estate taxes as an itemized deduction. Under joint tenancy, you cannot take the real estate taxes as an alimony deduction.
As tenants in common:
- As in joint tenancy, you can take an itemized deduction for half of the mortgage interest, and you can deduct half as alimony. Your ex-wife can take half of the mortgage interest as an itemized deduction. She must also report half of the mortgage interest as alimony.
- As in joint tenancy, you deduct one-half of the principal payment as alimony, and your ex-wife must report equally one half as alimony.
- But as tenants in common, you take half of the real estate taxes as an itemized deduction, and your ex-wife takes half as an itemized deduction.
- You deduct the remaining half of the real estate taxes as alimony, and your ex-wife must report an equal amount as alimony.
With a written agreement, you can also pay directly the home insurance, utility and other third-party bills and deduct such payments as alimony. You should consult a certified family law specialist attorney, however, to ensure such written arrangements are properly worded and filed.
Going through a divorce can be tough enough without the added burden of tax dilemmas. Sit down with your CPA to discuss your situation and how best to handle your finances to reduce your overall taxes.
Nancy A. Kearson is a Los Angeles-based forensic CPA as well as a Certified Valuation Analyst. She can be reached at (310) 785-9614.
Effective Use of an Accountant in Divorce
With the recent downturn in the economy, people are feeling insecure about their jobs, their bank deposits, their credit card balances, their retirement account values, and most, of all, the plummeting real estate market.