Divorce and Cost Basis

What is the name of your state?What is the name of your state? California


I am a Mortgage Consultant. A client is getting a divorce and would like to buy out his wife's interest in their house. They have about $300k equity. His lawyer, not his divorce attorney, told him that there would be no adjustment to the cost basis of the house in this scenario.

So the IRS would treat the cost basis as $550k and if he needed to sell the home anytime soon his $250k personal expemption would be used up. Is this true? Is there any way to structure the settlement so it did allow him to add the $150k on to his cost basis and make it $700k ? We would do a refinance to remove her from the mortgage and title and get her the money she wants.

Thanks

I am a Mortgage Consultant. A client is getting a divorce and would like to buy out his wife's interest in their house. They have about $300k equity. His lawyer, not his divorce attorney, told him that there would be no adjustment to the cost basis of the house in this scenario.

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That's the law in California. It doesn't matter how much one spouse pays for the other spouse's interest in the house -- whenever there is an interspousal sale of community property accompanying a divorce, there is no change in basis.

So the IRS would treat the cost basis as $550k and if he needed to sell the home anytime soon his $250k personal expemption would be used up. Is this true?

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Yes. If he made $300k, then he would have to pay long-term capital gains on the $50k above the $250k exemption.

Is there any way to structure the settlement so it did allow him to add the $150k on to his cost basis and make it $700k ?

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None that come immediately to mind. If he really wants to save taxes, they could sell the house while they are still married, take the $500k exemption, pay her off from the sale proceeds, and then buy another house after they get divorced. Of course, if he wants to sell and then rebuy the SAME house, don't try this without the advice of counsel, as you can go to jail for tax fraud!

What does his divorce attorney say about all of this?

He should be talking to his attorney today - thanks for the info