Home Sale

[Terry D EA]

Quick question. Client has been placed in a long term care facility and the personal representative needs me to calculate the gain on the sale of the primary residence. So far so go and no problem calculating the gain. A little tid bit that may or may not muddy the waters. The home is deeded in the taxpayer's name. The mortgage on the home is in the ex-spouse's name. The client meets the 2 of the last five rule for the 121 exclusion and there will be some remaining gain. My take is the client is 100% responsible for the gains on the sale. Correct?

[jklcpa]

In general lenders don't rewrite terms because of transactions like divorce or contributing encumbered property to an LLC.

Are you sure it wasn't handled through the divorce with an assumption of the mortgage by one and release of liability of the other? The other way would have been to refinance in only the one name.

[Terry D EA]

Judy,

Great question! All I do know is they are divorced. I have only processed the client's tax returns for the last four years and all are filed as single. I pull the property tax bills each year for Sch A and those are all in my client's name only. The tax card shows my client's name only. Another idea crossed my mind that maybe the ex bought her the house or like you say refinanced in the ex's name only. I say this because the home is located in a very upscale area and far more than a person on disability can afford. Might be a stretch but you never know. There is an attorney involved who has asked to speak with me about all of this. I don't think it really matters. The proceeds minus the payoff is being paid directly to my client and the IRS doesn't really care who pays them. Neither does the state.

[Lion EA]

Read the divorce decree.

Not to your question but just curious, who's been deducting the mortgage interest?

[jklcpa]

Terry, your client ending up with the home and ex with the mortgage may have all been part of the divorce settlement.

If that is the case, sec 1041 says that a transfer “incident to a divorce” is one that occurs within one year of the divorce and not more than six years from the divorce. Existing basis would shift to the person ultimately holding the property, and because your client owns 100% of the home, then she would report 100% of the sale, basis, and gain. She would also be entitled to the full $250K exclusion if she meets all of the requirements in sec 121.

[jklcpa]

2 hours ago, Terry D EA said:

Thanks Judy, I'm still waiting to hear additional information but what you stated very well be the case here.

 

 

Edited September 24, 2024 by jklcpa
moved rest of Terry's post to its own topic