Home Equity from Divorce

[ZmansGirl09]

What is the name of your state (only U.S. law)? Nevada and New Mexico

My divorce was final in December 2009. I live in Nevada, the community property house is in New Mexico. I lived in Nevada at the time of divorce.

My ex is finally doing the buyout and I expect to get my equity in a few weeks. He is refinancing and will "cash out" the amount to pay my equity.

Will I have to pay taxes on the amount I recieve? We bought the house at $111K, it was on the market for $145K. He is refinancing the remaining balance which is about $42K, plus my buyout, I suppose.

I plan on spending some of the equity to settle debt. The remaining balance will go into investments.

 

[LdiJ]

What is the name of your state (only U.S. law)? Nevada and New Mexico

My divorce was final in December 2009. I live in Nevada, the community property house is in New Mexico. I lived in Nevada at the time of divorce.

My ex is finally doing the buyout and I expect to get my equity in a few weeks. He is refinancing and will "cash out" the amount to pay my equity.

Will I have to pay taxes on the amount I recieve? We bought the house at $111K, it was on the market for $145K. He is refinancing the remaining balance which is about $42K, plus my buyout, I suppose.

I plan on spending some of the equity to settle debt. The remaining balance will go into investments.

Because it was your primary residence it is excludable from income up to 250k. So no, you do not have to pay taxes on it.

 

[davew128]

Because it was your primary residence it is excludable from income up to 250k. So no, you do not have to pay taxes on it.

Incorrect. It's not taxable because property settlements as a result of a divorce are not taxable events. It having been a primary residence is irrelevant.

 

[LdiJ]

Incorrect. It's not taxable because property settlements as a result of a divorce are not taxable events. It having been a primary residence is irrelevant.

Well that too...

But if it was a rental property, for example, and they sold it as part of their divorce, that would not stop them from having to pay capital gains tax if they had a capital gain, even though it was sold to facilitate a property settlement. Therefore there can be taxable events in property settlements.

 

[davew128]

But if it was a rental property, for example, and they sold it as part of their divorce, that would not stop them from having to pay capital gains tax if they had a capital gain, even though it was sold to facilitate a property settlement. Therefore there can be taxable events in property settlements.

Except OP is not receiving this money as a result of the home being sold so the analogy is innapropriate. OP is receiving this money from the ex for her interest in the marital home pursuant to the divorce.

 

[LdiJ]

Except OP is not receiving this money as a result of the home being sold so the analogy is innapropriate. OP is receiving this money from the ex for her interest in the marital home pursuant to the divorce.

Yes, but your statement that settlements that are part of a divorce are not taxable (as a blanket statement) is not accurate either. Which is the point I was making.

 

[davew128]

Yes, but your statement that settlements that are part of a divorce are not taxable (as a blanket statement) is not accurate either. Which is the point I was making.

Actually it IS accurate.

IRC 1041
(a) General rule
No gain or loss shall be recognized on a transfer of property
from an individual to (or in trust for the benefit of) -
(1) a spouse, or
(2) a former spouse, but only if the transfer is incident to
the divorce.(b) Transfer treated as gift; transferee has transferor's basis
In the case of any transfer of property described in subsection
(a) -
(1) for purposes of this subtitle, the property shall be
treated as acquired by the transferee by gift, and
(2) the basis of the transferee in the property shall be the
adjusted basis of the transferor.
(c) Incident to divorce
For purposes of subsection (a)(2), a transfer of property is
incident to the divorce if such transfer -
(1) occurs within 1 year after the date on which the marriage
ceases, or
(2) is related to the cessation of the marriage.

Nothing in my statement of "It's not taxable because property settlements as a result of a divorce are not taxable events" is contrary to this statute, in fact its spot on.

 

[LdiJ]

Actually it IS accurate.

IRC 1041
(a) General rule
No gain or loss shall be recognized on a transfer of property
from an individual to (or in trust for the benefit of) -
(1) a spouse, or
(2) a former spouse, but only if the transfer is incident to
the divorce.(b) Transfer treated as gift; transferee has transferor's basis
In the case of any transfer of property described in subsection
(a) -
(1) for purposes of this subtitle, the property shall be
treated as acquired by the transferee by gift, and
(2) the basis of the transferee in the property shall be the
adjusted basis of the transferor.
(c) Incident to divorce
For purposes of subsection (a)(2), a transfer of property is
incident to the divorce if such transfer -
(1) occurs within 1 year after the date on which the marriage
ceases, or
(2) is related to the cessation of the marriage.

Nothing in my statement of "It's not taxable because property settlements as a result of a divorce are not taxable events" is contrary to this statute, in fact its spot on.

Dave, why are you doing this? There are other people who are going to read this thread and get the wrong idea completely when they are handling their divorces.

They are going to sell something to divide it and think that the capital gain won't be taxable. Or they will take money out of a retirement account to pay off a spouse and think that its not taxable.

Will it make you feel better if I say that "taxable events can arise from a divorce settlement"? If I use the "geek speak" does that make it better?

 

[FlyingRon]

They are going to sell something to divide it and think that the capital gain won't be taxable. Or they will take money out of a retirement account to pay off a spouse and think that its not taxable.

Who said anything about selling the property?

 

[davew128]

Dave, why are you doing this? There are other people who are going to read this thread and get the wrong idea completely when they are handling their divorces.

They are going to sell something to divide it and think that the capital gain won't be taxable. Or they will take money out of a retirement account to pay off a spouse and think that its not taxable.

Will it make you feel better if I say that "taxable events can arise from a divorce settlement"? If I use the "geek speak" does that make it better?

It would help if you weren't being deliberately obtuse. The only person in this ENTIRE THREAD who has mentioned a sale is you. If somebody sells something, then it isn't a property transfer now, is it? If someone removes money from a retirement account without a QDRO from the divorce, it isn't a property transfer now is it?

 

[ZmansGirl09]

I understand the answer for my own situation, and I thank you both for the replies. I appreciate it very much!