Capital Gains Uestion On Property Sold
Hi. Please be patient..I am new at this. I owned a home that I lived in with my former wife for 18 years. As part of a divorce decree, the house was given to my wife. It remained empty for 2 years. Both of us moved out of state during that time, and I aquirred another property to live in. The home deteriorated to the point that it was unsaleable. I rehabbed the house with the agreement that my former wife and I would split the profits from the sale. The house has sold, with a capital gain of about $110,000, and I am wondering what capital gains liability there might be, if any, since both of us left the state. Thank you, one and all, who might give advice to me on this subject.
As long as the property was sold within three years of vacating the property, and as long as your capital gain falls within the capital gains exclusion on the sale of a primary residence, there is no capital gains tax liability.
Your situation seems to fit. Residence in the state is not a factor here.
newkidintown2..Thank you for your reply..I appreciate it very much. I was concerned because the state of Vermont withheld 4% of the total right off of the top at the closing. I appreciate your advice.
Please note that my response was directed only to your federal income tax return. A state withholding against your state income taxes probably happened because you were not a resident at the time of the sale.
Perhaps the amount withheld will be refunded when you file a Vermont state income tax return.
newkidintown2...Thank you again. I hope one day someone is as helpful to you as you have been to me.
If you had not already completed settlement, you might have challenged application of the withholding to your principal residence.
MD has a similar withholding requirement for out of state property owners. The withholding is 4.75% for individuals but is only applied to investment property. The withholding does not apply if "the property being
transferred is the transferor’s principal residence, as determined under the Internal Revenue Code."
Perhaps your former state has a similar provision.
Newkidintown2...Thank you again. I believe your last message might prove to be very helpful. My ex-wife, though she did not live in that house, lived much of the two years on and off in Vermont, where the house was sold. She should be able to qualify as a Vermont resident-in the divorce decree she was given the house, but we maintained our names together on the deed. I dealt with the real estate lawyer at the closing-she was not there, but gave the lawyer the power of attorney-since I was the one there at the closing, I guess he just mailed the money to the state because it made everything easier for him? Anyway, you have been a great help and encouragement. Thank you.
You missed my point. Having a Vermont residence is not at issue. The sale of the house you and your former wife owned must qualify under the IRS rules as the sale of a primary residence. If it does not, then the profits from the sale are taxable capital gains.
If your ex owned the house and you were no longer the owner, she would be responsible for the entire amount of the gain and could possibly use the primary residence exclusion.
If she gave part of the proceeds to you, I would say you have self-employment income from rehabbing the house. If you no longer owned the home, you can't use the exclusion. I doubt you could claim she gave you the money as a gift.
Probably best to contact a CPA. Do it now before they get too busy!
Good catch blueford. I may have wrongly assumed that the wife was given "use" of the house rather than complete title. In this case, then I agree that the ex-wife may still have her eligibility to a capital gains exclusion to shield the entire profit.
I don't see your point about the ex-spousal gift. Anyone can give anyone else a gift. The amount of the gift that exceeds $11K per year to a single individual must be reported on a Gift Tax Return, but that does not disqualify the gift as non-taxable income to the recipient.
Hi guys. I truly appreciate the time you have given to the subject. The story is, it was a kind and gentle divorce. The house, originally deeded in both our names, remained in both our names after the divorce. As part of the divorce decree, I just put in writing that she gets the house. After two years of sitting, with me paying the mortgage, I rehabbed it and sold it. We split the money left after paying off bank note/materials/lawyers/ realtors, etc. Now I am wondering what the capital gains liability might be. I apologize for not being clearer with the details earlier. Being new to this site, I did not expect such a high degree of expertise. Which brings to mind another question...what happens with capitol gains when a couple divorces and the house gets sold?? Because, basically that is my situation. Thanks
I go back to my original response. You both owned the house (since you apparently never gave your ex a quit claim deed to the property),
AND if you both occupied the house as your primary residence at least two of the five years prior to sale,
THEN you each qualify for the capital gains exclusion on your respective share of the sale profits,
UNLESS you used the capital gains exclusion in the past 24 months, in which case your sale profit this time is a taxable capital gain.
[ Edited by NewKidinTown2 on Date 12/03/2004 ]
Awesome. You put a big smile on my tired old wrinkly face!
I agree. As long as it's still in both of your names, you should both be able to use the exclusion, provided all of the other conditions are met.
NewKid - what I was saying about the gift - If the house would have been only in her name and the IRS knew that he received some of the proceeds due to his rehab work, he would have a difficult time saying the money received was a gift rather than compensation for his rehab work. IRS asserts that in a business-type relationship, there is rarely a true "gift". They would argue (and probably win) that it wasn't a gift under the circumstances since he provided something of value.
You guys are the best. Thanks.