Is anyone knowledgeable about capital gains tax?

[starburst604]

There's a lot of info on the internet but I'm still uncertain about this. As many know, we sold our townhouse and bought a new house less than a year ago, and now we are divorcing and selling the house. Here's the pertinent info:

Closed on new house 6/16/23, we did not owe on capital gains on our townhouse sale because our gain was lower than the criteria and we had been living there for 9 years 
Will close on sale of house 6/28/24
When we pay back the remainder of the mortgage, we'll be left with around $325K which we'll be splitting 50/50
We will likely be legally married until spring of 2025
STBX will be renting for at least a couple of years
I'm moving into a townhouse that my dad is purchasing and will rent from him until divorce is final, then I will get a mortgage to buy it from my dad. I think there's something about avoiding capital gains if you buy a new home within 12 months, which may be possible if I buy right after the divorce is final, but I don't know how that works since I'll be filing taxes prior to that?
Does the divorce provide any exemption from us living there for such a short time? 

What I'm wondering is how much we will owe and will we both owe the same amount? Does it matter if we file as married filing joint or separately? I appreciate any knowledge someone might have on this. I have been trying to get in touch with the accountant we use, but he hasn't gotten back to me. 

[mae0111]

I am not an expert at all... but is that $325K all profit? Like, the property has appreciated $325K in the year that you owned it?

You only pay taxes on the appreciation of the property, not the actual cash that you take out.

[starburst604]

May 6, 2024 12:13:05 GMT -5 mae0111 said:

I am not an expert at all... but is that $325K all profit? Like, the property has appreciated $325K in the year that you owned it?

You only pay taxes on the appreciation of the property, not the actual cash that you take out.

Ah ok. No, the property hasn't appreciated that amount, it's basically us getting back our down payment plus some appreciation. Do I count the appreciation as the current sale price vs. what we bought it for? In that case it would be $112K. 

[simpsongal]

May 6, 2024 12:21:02 GMT -5 starburst604 said:

May 6, 2024 12:13:05 GMT -5 mae0111 said:

I am not an expert at all... but is that $325K all profit? Like, the property has appreciated $325K in the year that you owned it?

You only pay taxes on the appreciation of the property, not the actual cash that you take out.

Ah ok. No, the property hasn't appreciated that amount, it's basically us getting back our down payment plus some appreciation. Do I count the appreciation as the current sale price vs. what we bought it for? In that case it would be $112K. 

Yup, and you can only take the capital gains exemption every 2 years, so I suspect you'll have to pay capital gains on the $112K since you just took the exemption for the sale of the town house.

www.irs.gov/taxtopics/tc701

ETA: If you made capital improvements to the home since you bought you can deduct that from the gain (e.g., upgraded insulation, roofing, etc.).  

[starburst604]

May 6, 2024 13:43:05 GMT -5 simpsongal said:

May 6, 2024 12:21:02 GMT -5 starburst604 said:

Ah ok. No, the property hasn't appreciated that amount, it's basically us getting back our down payment plus some appreciation. Do I count the appreciation as the current sale price vs. what we bought it for? In that case it would be $112K. 

Yup, and you can only take the capital gains exemption every 2 years, so I suspect you'll have to pay capital gains on the $112K since you just took the exemption for the sale of the town house.

www.irs.gov/taxtopics/tc701

ETA: If you made capital improvements to the home since you bought you can deduct that from the gain (e.g., upgraded insulation, roofing, etc.).  

That's helpful, thanks! We did put in fencing, a stone patio and irrigation system, which all look like they fall under capital improvements. At least we have that going for us. 

[jwright]

Yes, make sure you are calculating the actual gain

Sales Price - Selling Costs (realtor fees) - Basis in the Property (amount you bought it for plus capital improvements) = Realized Gain

Now, as you know you get an exclusion of $250,000 each (so $500k if you file jointly) if you have lived in the house as a principal residence 2 of the past 5 years. If you do not meet this timeline, you can pro-rate the exclusion for the amount of time you did live in the house. Looks like you will have almost exactly one year since your previous use of the exclusion so you can take 50% of your $250,000. There is some case law that if you move out but jointly own the house the spouse can still consider the time the ex-spouse remained in the house toward his timeline.

Also, you can still get the entire exclusion if you have to sell the house for "unforeseen circumstances" ; I believe there is precedent for divorce being considered an unforeseen circumstance and you can use the whole exclusion. If you want to take that route, I would consult a CPA.