capital gains tax question

betonyDecember 7, 2005

When my husband and his ex-wife separated in 2002, they refinanced the family home to raise cash for a downpayment on a second house, where she would live. They have joint custody, so the children spent half the time with him in the former family home and half the time with her in the new house. They jointly paid the mortgages on both houses until this fall, when they sold the former family home and split the proceeds.

She then she purchased his equity in her house, which netted him $79,000. Their initial downpayment was $90,000, and they jointly paid $68,000 in PITI over the course of three years, hence he invested a total of $79,000 in her house. Does he owe any capital gains taxes, given that (a) he only "invested" in this house because his then-spouse could not afford to purchase it on her own; (b) he only "disinvested" so as to separate his finances from those of his former spouse; and (c) the house is not strictly an investment property, because his children have been living there half the time?

Thanks in advance...

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He can exclude up to $250,000 of the gain on the sale of the former family home. The wife might be able to exclude $250,000 depending on when she moved out of the house. One can only use this exclusion once every 2 years, so based on what I understand of the situation, he cannot use the exclusion for the wife's house. However, it MAY not be taxable if the situation with the wife's house was part of the divorce decree. Property settlements which part of divorce aren't taxable.

Good luck

    Bookmark   December 8, 2005 at 7:25PM
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Seek wise counsel. I'm pretty sure it's not quite as simple as the Section 121 exclusion mentioned above.

    Bookmark   December 21, 2005 at 8:24PM
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