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Need to sell, what to do??

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skon12

Junior Member
What is the name of your state?AZ
In November 2004 my wife at the time and I put money down to build a new house. During the time it was being built we decided to separate and I agreed to move into the new house in November 2005. We paid 307K and financed about 291K of it in both our names. I am living there and my mom is paying me rent for one of the rooms since november. Well I am going to have to sell because it is too expensive for me. Good thing is I can probably sell for about $460K. My question is what will my tax penalty be if I sell and roll every dime after closing into a cheaper house. I know a 121 has exclusion rules, but I can not afford to take a huge hit in taxes. Also will my wife be responsible for half of the taxes? I talked to a 1031 exchange person and they said I could probably take part of a 1031 since my mom has been paying rent. Just need some advice to get started. Thanks.
BTW my wife is still living in our old house which has about 200K in equity so I feel I am getting the short end of the stick.
 


LdiJ

Senior Member
skon12 said:
What is the name of your state?AZ
In November 2004 my wife at the time and I put money down to build a new house. During the time it was being built we decided to separate and I agreed to move into the new house in November 2005. We paid 307K and financed about 291K of it in both our names. I am living there and my mom is paying me rent for one of the rooms since november. Well I am going to have to sell because it is too expensive for me. Good thing is I can probably sell for about $460K. My question is what will my tax penalty be if I sell and roll every dime after closing into a cheaper house. I know a 121 has exclusion rules, but I can not afford to take a huge hit in taxes. Also will my wife be responsible for half of the taxes? I talked to a 1031 exchange person and they said I could probably take part of a 1031 since my mom has been paying rent. Just need some advice to get started. Thanks.
BTW my wife is still living in our old house which has about 200K in equity so I feel I am getting the short end of the stick.
You really need to consult a local attorney.

You are entitled to 1/2 of the equity in the home that she is living in. (that accrued during the marriage) She is entitled to 1/2 of the equity in the home that you are living in....unless you executed a separation agreement that states differently.

It sounds to me like she is living in a home with 200k equity and you are living in one with about 153k equity. Depending on your other division of marital assets/debts, (including retirement accounts) that may result in an even split of total assets/total debts.

Its not her fault that you are choosing to sell the home before capital gains can be excluded. However, you can be sure that unless she gets 1/2 of the gain, she is not going to be held responsible for 1/2 of the tax.
 

abezon

Senior Member
If the home sale occurs pursuant to a divorce, you will qualify for a reduced exclusion based on the number of days you lived there. I would recommend you not claim depreciation when you file this year, as it will reduce your applicable exclusion also.

Are you renting to mom at market rates? If she's just contributing to the household expenses, you may not have a landlord-tenant relationship at all & the money she pays is not taxable rent.
 

Ohiogal

Queen Bee
1031

You really need to consult with someone who understands 1031 exchanges. You cannot use 1031 exchange money to buy your residence and it also cannot be used to go to a smaller LESS EXPENSIVE property. 1031 exchanges are used to DEFER capital gains taxes -- but they have requirements that must strictly be followed. You need to go into more debt in acquiring them. You need to be buying INVESTMENT property and not your residence. It needs to be a like-kind exchange. A portion MAY be able to be deferred however you would have to invest in a more expensive investment property to replace the deferred portion. Which would defer the capital gains tax. And then you have to keep that property as an investment property for a certain amount of time.
 

LdiJ

Senior Member
abezon said:
If the home sale occurs pursuant to a divorce, you will qualify for a reduced exclusion based on the number of days you lived there. I would recommend you not claim depreciation when you file this year, as it will reduce your applicable exclusion also.

Are you renting to mom at market rates? If she's just contributing to the household expenses, you may not have a landlord-tenant relationship at all & the money she pays is not taxable rent.
My only concern would be whether or not they have already made a property settlement, and the house that he is living in became his property in that settlement. It isn't clear whether their agreement is formal or informal.

If so, it might be difficult to classify it as a sale connection to a divorce. I agree about the depreciation...that would just complicate things more.
 

skon12

Junior Member
No formal settlement yet. I have said that if she signs a quit claim deed to the house I am in, I will sign one on the house she is living in. Will this exclude her from getting 50% of the sale? She has verbally agreed to this, as she will come out ahead equity wise. Or do I wait until the divorce is finalized. Finally could forming an LLC or a Nevada corporation help me lessen my capital gains if I make my property part of the corporation? Just an idea. Im leaning towards selling and renting an apartment for a year and invest the money in something safe to offset the costs of capital gains. Let me know your opinions.
Thanks
 

abezon

Senior Member
Yes. She takes the gains in her house; you take the gains in yours. Be sure you are compensated for the imbalance in equity with other property.

Transferring the house to a corp will not lessen the gains. The corp will get the same basis as you & pass through any gains. If you form a C-corp, the corp pays taxes, then you pay taxes on the dividend distributions.

What's safer than a house? Muni bonds? Talk to a financial advisor about where to put your money.
 

skon12

Junior Member
She wont compensate me, because she can barely afford the payment as it is. I am tired of fighting and trying to do what is best for my children. I want them to stay in their school. I will basically going to lose out on about 35K if she sells it. I will more than likely have her sign a paper in the divorce agreement that states if she sells it she will need to pay at least 1/2 her debt she owes out of the proceeds especially since she will have no Capital Gains to pay. Plus if I sell this May when will capital gains be due? Can I get an extention to help offset the capital gains with investments?
 

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