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Old 10-26-2013, 09:02 AM
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Not a divorce - but question on IRS reporting requirements home equity split

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 homes 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 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?



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Old 10-27-2013, 12:43 AM
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Originally Posted by josephp732 View Post

#1;My question is should I be filing anything with the IRS to report this payment?



#2; Also does my cost basis for this home change if I were to sell it in the future?

#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 month (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 ned topslit it out between you and your GF. And then calculate your profit or loss would be; Selling price - Cost Basis including seling costs or etc = 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, yu 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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Old 11-25-2013, 07:57 PM
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Thank you the detailed answer - but I am not sure if I explained it correctly. I never "sold" my home...In theory my GF sold her half to me for half the equity in the home - it was a buy out... she doesn't really have a cost basis because I just put her name on the deed two years after I purchased the home - she would have capital improvements that she paid for during us living together. My question is do I need to report to the IRS the $58,000 buy-out amount that I paid her to remove her name from the deed? If I do how do I report it? what forms? - Thank you



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Old 11-26-2013, 02:46 AM
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Originally Posted by josephp732 View Post


#1; the detailed answer - but I am not sure if I explained it correctly. I never "sold" my home...In theory my GF sold her half to me for half the equity in the home - it was a buy out... she doesn't really have a cost basis because I just put her name on the deed two years after I purchased the home -


#2; she would have capital improvements that she paid for during us living together.


#3;My question is do I need to report to the IRS the $58,000 buy-out amount that I paid her to remove her name from the deed? If I do how do I report it? what forms? - Thank you
#1;Your situation is very complex. As your deed to your pty(you actually owned it exclusively) was changed to add another owner as a joint tenant, you GF, as a co-owner, it means that a gift has been made of 50% of the FMV and 50% of your adj basis now belongs to her basis and you had to file form 709 with the IRS(as long as the FMV of 50% share of the pty exceded $13K for 2013, $12K for 2012 so on or etc). ALSO as long as the FMV of the 50 % share of the pty exceeds her adj basis, then her basis’d be FMV; as long as her adj basis exceeds FMV of the 50% share of the pty, then if she sells the share more than her adj basis , then her adj basis for gain/loss’d be her adj basis. For example, adj basis of the 50% share of the pty is $50K(THIS MEANS I Assume that your adj basis is $100K so 50% of $100K is $50K) and FMV of the share is $45K f she sells the 50% share of the pry for , say, $55K, then her gain is $5K;$55K-$50K. However, also assume that her adj basis is $50K and FMV of the 50% share of the pty was $55K, then you buy it for $60K, then her adj basis is $55K , NOT $45K.

So to sum it up, assume that your adj basis of the pty was $100K, and 50% of it was given to her as a gift then your Adj basis is $50K including her cap improvements ;$100k-$50K, and you buy it back from her for $say $70K , then your adj basis is now $120K.;$70K+$50K.

#2;Yes as mentioned above, the purchase price of $58K is included as your basis. Her cap improvements are all included in her adj basis and it also included in yur adj basis b being transferred to your purchase price, in this case, $70K as mentioned above.

#3;no certain form.It is not legal to deduct home improvement costs from tax returns but it is legal to add it to the taxable basis of income. Yyou just need to determine your initial tax basis ,quite simply, the price you paid for the property. For example, if you purchase the pty as an investment for $100K your initial tax basis on the property is $100K; then you need to calculate improvements to the property. Any capital improvements made to the property with a useful life of one year or more are allowable adjustments to the property's tax basis. Some examples of allowable improvements include additions to the property, replacing an entire roof, paving the driveway, installing central air conditioning and similar major improvements to the property. Any legal fees, permitting fees and zoning fees paid to accomplish the improvements are also allowable adjustments to the property's tax basis.you need to keep all necessary records receipts/ work invoicesor etc/.
Maintaining good records is a critical step. The easiest way to maintain records of adjustments to a property's tax basis is to start a legal-size folder on the property when you purchase it. The first document to go into the folder is the HUD-1 form you receive at closing which lists the property purchase price and all the associated closing costs in an itemized format. From that point on, keep a record of all major expenses and improvements related to the property.and when you sell it , you need to contact a CPA/ an IRSEA in your locare for professiona help for determining basis of the pty.your tax accountant will calculate your correct tax basis in the property and make sure you receive all the allowable adjustments to lower your capital gains tax on the sale. If your accountant's determination of your tax basis is different from your own, the discrepancy is easy to find by going back to the property's records.



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