In a Divorce, the Spouse Who Buys the Family Home Keeps the Original Tax Basis

Q. In my divorce settlement, I am getting the house. It has a tax basis of $240,000 but was appraised at $590,000 as part of the divorce settlement proceedings. Is the $590,000 my new tax basis?

--P.H.

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A. Assuming you didn’t roll over a gain from the sale of a previous house, your tax basis in the house is its original purchase price, $240,000, plus whatever improvements were made to it.

Section 1041 of the Internal Revenue Code provides that if the home is sold from one spouse to another “incident to a divorce,� the selling spouse (in this case, your husband) does not have a taxable gain. Further, it says the buying spouse (you) keeps the original tax basis of the home, not its increased value based on the 50% sale that was based on the most recent appraisal.

These arrangements typically work to the advantage of the selling spouse. Our experts have repeatedly advised that because of the inequity inherent in these deals, the purchase price between spouses should be negotiable. Attorneys and accountants should be consulted before anything is signed, in order to unravel tax ramifications.

By the way, the sale of half the house to your ex-husband does not trigger a reassessment for property tax purposes.

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Q. My wife and I are divorcing. We are over age 55 and would like to take maximum advantage of the $125,000 profit exclusion when we sell the house we have lived in for the last 20 years. Should we make certain that escrow does not close before the final decree, so that one of us does not lose his or her right to an exclusion? As unmarried people, would we each be entitled to an exclusion? Or is only one exclusion allowed per house, leaving the divorcing couple to choose who gets it?

--O.H.S.

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A. The rules are actually quite simple. The Internal Revenue Service allows one $125,000 profit exemption per person or per married couple. The exemption is given to people, not houses. So more than one unmarried person can use his or her exemption on profits resulting from the sale of a house they have shared.

What does this tell you? Simply this: You should have your final divorce decree in hand before you sell your house if you each want to use a $125,000 exemption. Otherwise, you will be forced to share a single exemption.

But there’s more. The IRS has been known to argue that a sale is essentially complete when all contingencies are met--not just when escrow closes. IRS agents can figure out when a divorcing couple is stalling the close of escrow to allow time for the final decree. So your safest bet is to wait until after your divorce is final to open escrow. Of course, in today’s slower real estate market, even if you put the house on the market before the divorce is final, you might have your decree well before you receive an offer from a buyer.

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Q. I will turn age 70 1/2 this year. I have an individual retirement account from which I withdrew more than double the legally required minimum amount last year. Does this affect the amount that I may legally withdraw for this year?

--J.F.C.

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A. No. You do not have to take a minimum distribution until April 1 of the year after the one in which you turn age 70 1/2. The fact that you took double the minimum amount last year does nothing to change that.

The legally required minimum withdrawal that you must make by next April 1 will be based on your life expectancy and that of any beneficiaries of your IRA. The balance in the IRA as of December of the year before you turn age 70 1/2 will be divided by the total number of years of life expectancy. So by taking a large distribution last year, you lowered the amount that will be used to calculate your minimum required withdrawal.

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Q. What is the tax obligation for the sale of family collections such as stamps, coins, pictures and furniture? Stamps and coins have a face value. Would the amount realized above the face value of a coin or stamp be considered a taxable gain? What about gold coins? They are no longer legal tender.

--C.W.

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A. In this case, the tax law is fairly simple to apply.

The taxable gain from the sale of such capital assets as furniture, artwork, stamps and coins is calculated by deducting your actual cost of the asset from your sales proceeds. The face value of coins and stamps is irrelevant unless, of course, it happens to correspond to what you paid for the asset. Your profit from the transaction is considered a capital gain and under current law is treated as ordinary income, up to a maximum of 28%, for the purposes of taxation.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or send e-mail to [email protected]