Capital Gains Woes

[Dreadmuse]

What is the name of your state? Florida

My wife and I bought a home about 3 months ago. We sold the house after 2 months because of marital problems that looked to be ending in divorce. We sold the house, maintain seperate residences and divided all assets. Before the paperwork was filed, we decided to take our time and try to work things out .

Now the problem...
Since we were in the house for less than 2 years, we are going to get slammed by capital gains. Florida does not recognize legal separation, and I'm not thrilled about the idea of filing for divorce. I'm not even sure that filing now would work since the house was sold prior to the divorce date... I'm looking for a way to minimize the impact that this is going to have on both of us... any help would be greatly appreciated.

 

[anteater]

What is the name of your state? Florida

My wife and I bought a home about 3 months ago. We sold the house after 2 months ......

The house appreciated in value enough in 2 months that you are going to get "slammed" by capital gains taxes?

I gotta tell you -- I wouldn't mind having that problem.

 

[Snipes5]

You also probably qualify for a reduced exclusion, which should handily eliminate any capital gains tax.

Snipes

 

[Dreadmuse]

Sorry if I sound stupid on this, what is a reduced exclusion?

I know if I buy a house (unlikely with the housing costs around here), the tax is deferred... I don't even know if divorce now will get rid of the tax, because the divorce date is after the sale of the house...

 

[anteater]

Sorry if I sound stupid on this, what is a reduced exclusion?

I know if I buy a house (unlikely with the housing costs around here), the tax is deferred... I don't even know if divorce now will get rid of the tax, because the divorce date is after the sale of the house...

Deferring tax by using the proceeds for purchase of a new residence went out in 1997 (I think it was 1997). It was replaced with the capital gain exclusion amount.

If you have big capital gains bucks floating around, you should be talking specifics with a CPA or Enrolled Agent. Get familiar with the topic by reading through:

http://www.irs.gov/pub/irs-pdf/p523.pdf

In particular, check out the "Unforseen Circumstances" section under "Reduced Maximum Exclusion."

 

[Dreadmuse]

I looked into the unforseen circumstances but
'was going to get a divorce but are instead not going to file and live seperately to see if things can be worked out'
is not on the list... (how short sighted of the IRS)

I suppose the question is, how would we go about proving that it would be considered an unforseen circumstance? Especially since we don't fit in any of the catagories, and the state does not recognize legal seperation. Does the state not recognizing legal seperation mean that the federal government would not recognize a seperation?

I know I am full of questions... I just have a personal thing about filing for divorce.

 

[LdiJ]

I looked into the unforseen circumstances but
'was going to get a divorce but are instead not going to file and live seperately to see if things can be worked out'
is not on the list... (how short sighted of the IRS)

I suppose the question is, how would we go about proving that it would be considered an unforseen circumstance? Especially since we don't fit in any of the catagories, and the state does not recognize legal seperation. Does the state not recognizing legal seperation mean that the federal government would not recognize a seperation?

I know I am full of questions... I just have a personal thing about filing for divorce.

First, you need to understand your "basis" in the property, because I think that its possible that you don't have a problem.

Your basis in the property is the total amount that it cost you to purchase the property, including closing costs...PLUS any costs of improvements...PLUS any costs of selling.

You deduct that total from the selling price of the home, and that is your "profit" and that is the amount on which you pay capital gains.

Unless you got some major deal on the home, if you only owed it two months the odds of you actually making a "profit" are very slim.

Even though your state doesn't have legal separation, the fact that you have separated and live apart is generally enough to qualify you for a reduced exclusion.

Divide 250,000 by 12 x 2. This equals a reduced exclusion of over 41,000 for each of you. If you can own a home for two months and make any profit, let alone a profit of more than 82,000....then I need to start investing in property in your area.

 

[anteater]

....then I need to start investing in property in your area.

Me too!!! That's why I wonder if Dread actually has a problem. Just the costs of selling should wipe out two months' appreciation, even if real estate prices are zooming.

 

[Dreadmuse]

60k was the capital gains on the house (we bought preconstruction). If it was an investment issue it I would have been smiling all the way to the bank.

Our situation is this, we divided assets already, we have nothing jointly held. We live apart and support seperate residences. Total I am looking at a 12k hit in Capital gains (and yes to me that is a great deal of money). We were hoping to be able to add close to 10k worth of furniture that we sold with the house, but the IRS guy my wife spoke to said that it would not count. I consider it a cost of selling the house, the guy didn't want the house without the furniture.

While I know that the risk of getting audited over 12k is slim. How would we file, married filing seperately? That just sounds like an audit flag waiting to happen. What would we need to do to prove that we seperated?