I have a question regarding whether I should be filing any documents with the IRS on a personal asset split done because of the ending of a relationship. I purchased a home for $205,000, deeded in my name. Two years later I put my girlfriends name on the deed – she did not pay any money to me. During the course of the next 8 years we lived together and split the home expenses, including the monthly mortgage payments equally, with her paying me a single monthly payment for her share of those expenses. She also paid directly for large improvements to the home – like $13,000 for a porch, $10,000 for remodeling the basement – in these situations she paid for the materials and I did the work myself. About 3 years into the relationship I did a mortgage refinance for a major improvement (pool installation) – at that time the new mortgage was signed as me being the primary and her as a co-signer.
When the relationship ended we agreed that I would buy her out of the home based on a professional real estate appraiser's value less the current mortgage – IE… the equity position of the home. The home’s value was estimated at $326,000 and the current mortgage was $210,000 creating and equity position of $116,000. I proceed to refinance the home removing her name from the mortgage, we redid the deed removing her name from it and giving me sole ownership. I paid her half the equity in the home $58,000 less an agreed upon value of $12,240 for an engagement ring – (she kept the ring). My lump sum cash payment to her was $45,760. An agreement outlining all of this was written up by our attorneys in a separation agreement – then signed and notarized. My payment of $45,760 was made in January 2013. My question is should I be filing anything with the IRS to report this payment? Also does my cost basis for this home change if I were to sell it in the future?
Answer :
1 : It depends. When you sold your main home and made a profit, you may be able to exclude that profit from your taxable income. TO EXCLUDE GAIN ON THE DISPOSITION OF A HOME from income under IRC section 121, you must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250K for MFS ($500K for certain married taxpayers). In other words, the home must have been your principal residence. You can ALSO exclude a portion of your gain if you are selling your home and lived there less than 2 years and you meet one of the three exceptions; Change in the Location of Your Job ; Health Concerns; Unforeseen Circumstances.
You calculate your partial exclusion based on the amount of time you actually lived in your home.
Count the number of months you actually lived in your home. Then divide that number by 24. Then multiply this ratio by $250K (if unmarried) or by $500K (if married). The result is the amount of gain you can exclude from your taxable income. For example: you lived in your home for 12 months, and then sold the home because your employer asked you to relocate to a different office. You are an unmarried person. You calculate your partial exclusion: 12 months divided by 24 months (for a ratio of .50) times your maximum exclusion of $250K; you can exclude up to $125K in gain. If your gain is more than $125K, you include only the amount over $125K as taxable income on Sch D/Form8949. If your gain is less than $125K , then your gain can be excluded from your taxable income.
You cannot deduct a loss from the sale of your main home any loss on the Sale of a Home.
NOTE : When you sell your primary residence, you can make up to $250K as mentioned above, on the sale and keep it -- tax free. There is no reporting requirement to the IRS and no capital gains up to $250K.
2 : Yes; you need to calculate your Cost basis and CG. Just like calculating capital gains, the formula for calculating the gain or loss involves subtracting your cost basis from your selling price.The formula for calculating your cost basis on your main home is ;Purchase price + Purchase costs (title & escrow fees, real estate agent commissions, etc.) + Improvements (replacing the roof, new furnace, etc.) + Selling costs (title & escrow fees, real estate agent commissions, etc.) = Cost Basis and I guess you need topslit it out between you and your GF. And then calculate your profit or loss would be; Selling price - Cost Basis including selling costs or its = Gain or Loss
If the resulting number is positive, you made a profit when you sold your home. If the resulting number is negative, you incurred a loss.
Finally, you also need to calculate your taxable gain:Gain - Maximum or Partial Exclusion , $250K as said above as long the pty was primary residence = Taxable Gain
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