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CGassist.168
CGassist.168, Accountant
Category: Capital Gains and Losses
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During a divorce settlement, a wife is awarded the home and

Customer Question

During a divorce settlement, a wife is awarded the home and the home has to be sold, the question remains in the home is solely in the name of the husband and he receives non of the proceeds due to the settlement who is responsible for those taxes incurred under capitol gains
Submitted: 10 months ago.
Category: Capital Gains and Losses
Expert:  CGassist.168 replied 10 months ago.

Q: who is responsible for those taxes incurred under capitol gains

A: Based on the following, the wife would be responsible for gains if there are any. SEE BELOW:

Internal Revenue Code (I.R.C.) § 1041, the "Magna Carta" of this area of the tax law, was a legislative response to a U.S. Supreme Court decision holding that the transfer of appreciated property in exchange for the release of marital rights resulted in the recognition of gain to the transferor. Congress believed that, in general, it was inappropriate to tax property transfers between spouses. The I.R.C. already recognized that spouses were able to transfer property between themselves free of gift taxes. In enacting I.R.C. § 1041, Congress recognized that the existing rules had not worked and had resulted in controversy and litigation. Congress attempted to simplify the rules by treating spouses or former spouses as one economic unit; and treating the transfer of property incident to a divorce and the transfer of property between spouses, for income tax purposes, as gifts.

I.R.C. § 1041 provides that no gain or loss is recognized on a transfer of property from a spouse or a former spouse to a spouse or former spouse if the transfer is incident to a divorce. The tax treatment described by this section is mandatory and applicable to U.S. citizens and resident aliens. The parties cannot elect out of it. The section is applicable even if the spouse or former spouse pays consideration for the property by giving up rights, transferring other property, or paying cash.

It is important to note that this is also the tax treatment of property transfers between spouses during marriage.

The transferee former spouse takes the transferor's tax basis in the real property determined immediately before the gift, i.e., the tax basis is carried over for income tax purposes. This rule is applicable whether the fair market value of the real property transferred is less than, equal to, or greater than the transferor's adjusted tax basis in the property prior to the transfer.

REFERENCE SOURCE:

If the qualifications are met, you and your spouse will qualify for the $500,000 home sale exclusion. There is likely not going to be a gain. SEE BELOW:

If You Sell Together

If you and your spouse sell your house at the time you’re getting divorced, the capital gains tax applies. But you’re entitled to exclude a total of $500,000of gain from tax if you lived there for two of the five years before the sale.(If either spouse is in the military that five-year period can be extended for up to ten years under some circumstances.) And if you bought the house less than two years ago the exclusion may be reduced.

For more information regarding the $500,000 exclusion, you can refer to the IRS Pub 523.

Link to IRS Pub 523:

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

Let me know if I can be of further assistance to you regarding this matter.

Customer: replied 10 months ago.
If the divorce was final before the property sold, I am just trying to understand the law the 500,000 exclusion only applies if the couple were still legally married.
Expert:  CGassist.168 replied 10 months ago.

It doesn't matter if you were married at the time of the sale, if both of you meet the residence and use test, you will still qualify for the $500,000 exclusion. You can refer to page 3 of the IRS Pub 523 for the qualifications to exclude the $500,000. Even if both spouses do not meet the residence and use test, it is likely that one does. If this is the case, then $250,000 can be excluded from the home sale.

Customer: replied 10 months ago.
I also understand under the gift aspect there is no liability. Is there anyway that she can be made liable for the funds received it was substantial enough to have capitol gains filed
Expert:  CGassist.168 replied 10 months ago.

Q: Is there anyway that she can be made liable for the funds received it was substantial enough to have capitol gains filed

A: Yes, I provided that information in my first response. SEE BELOW:

The transferee former spouse takes the transferor's tax basis in the real property determined immediately before the gift, i.e., the tax basis is carried over for income tax purposes. This rule is applicable whether the fair market value of the real property transferred is less than, equal to, or greater than the transferor's adjusted tax basis in the property prior to the transfer.

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You are the tranferor, she is the transferree

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