OK, here we go…
My wife, who was my girlfriend at the time, bought 50% of my house in dec. of 2005. We were married in ’06. We’ve both lived in the house since fall ’05.
I took my cap. gains exemption at that time, Dec. ’05.
We’re going to sell this summer, if we can get a decent price.
Since the value of my wife’s half has almost certainly dropped since 2005, but the basis of my remaining half is low enough to show significant profit, can we apply her exemption to my remaining half’s profit?
I realize this may not be the appropriate forum for a tax question like this, but y’all are pretty knowledgable… whadda ya say?
k
Replies
"I took my cap. gains exemption at that time, Dec. '05."
Tell me more......
My basis on the half I sold in 2005 was 116k. My wife bought that half for a conservatively valued 305k (at the time- a realtor friend said he could have sold the house for 700 easy) . I didn't pay any cap. gains on the 189k profit, using my exemption.
So, four years later, we want to sell as a married couple. Her half hasn't increased in value, my half may have decreased slightly, but is still worth significantly more than the 1993 basis of 116k.
Can I apply my wife's exemption to my profit, since we are married after all?
k
i'm chewing on this at the moment,and i'm not a tax guy,but this is a interesting situation. i don't think you find a line on quick tax that covers this one.lol
but at first look if i was a irs guy is your trying to screw with us.if you would of sold in 05 for 700 your exemption would not of been enough and me [irs agent] and gw could of made a little money. but instead you sold it to a stranger [1/2] who you just happened to fall in love with and get married. now she wants a exemption,and you want another one on the same house.remember irs only recognizes "arms length transactions" if they feel there was any collusion involved just pull out the checkbook they want paid.
you can do anything you want as long as they don't audit you,but with this deal i'd say you need to set aside some time in the future for a meeting.
heres some things that i think are relavant , first how was the deed filled out orig? 2 single persons? then when you got married did you redo to etux status? do you both fill a joint return or do you file separate but married? if i was to track this woman that bought half,where did her money come from,i better not be able to track it back to you as a "loan" that was repaid soon after the closing.that would be a no no might even be called tax evasion.
i know it would be a cleaner deal if she wouldn't of taken deed till after you was married,today you sell,claim your joint exemption and go on.
man i thought i got into some goofy deals,lolYOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
Yeah, it is convoluted, isn't it. My understanding is that as a married couple, we can move money freely back and forth, so that may ease things up. Her money trail is clean (rich dad).
But you're right, in essence I am getting both exemptions.
Is it legal? Dunno. I'm pretty sure I'll have to pay for a real opinion, but somewhere, someone must have been through this already...
k
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i love tax deals,cause to tell you the truth no one knows for sure,if you called irs they would say "i dunno"
so i'm throwing figures here
todays value is 600k ,your sale price is 300k each, your basis was approx 116 ,but that got wiped to zero when you sold for 305.so now you have a gain of 300. you have already used 189of a 250 exemption.so i think you will be paying taxes on approx 240k.[is this in the area of what your thinking?1 time you recieved 305,next time 300.less basis of 116 =gain of 484k less 250 exemt= 234k to pay taxes on]
now on your wifes side, she bought for 305,call that her base and she sells her half for 300,she would have some loss but not enough to even knock a dent in your gain .this is how i would see this as if i had bought 1/2 from you and moved in as a roomate and now we both decide to sell.
hindsights perfect and if this was a deal to raise cash,probably would of been better to of sold complete deal to future wife for 375k,taken your exempt,then married ,lived there 2 years and sold as a couple for a 500k exempt.i think that would fly.
if you take any tax advice from me,please email me your cell # and i will be sure to send you a birthday card every year................... YOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
LOL. Internet tax advice... worth every penny you pay for it. Kids, don't try this at home.
In this case, the basis on my remaining half is still 116k, so my gain this time will be around 180k. (My basis for the whole house was 232K, what I paid in 1993).
I guess the current basis on the whole house is 421k (my 116 + her 305). So if we sell for 600k, the total house gain will be 179k. Seems like we should be able to use her 250k exemption to offset that, even if all the gain is from my half?
k
i think your basis is gone, you sold for 305. deducted the base of 116 for a gain of 189k,techniclly you had 0.00 in your half at the closing for selling half.
how do you come up with 116 is still laying there for your base?you got all your 116 back and then made a profit of 189k.not trying to beat on you,just trying to learn something .OK FORGET THAT PARAGRAPH!i didn't catch that you orig started at 232. so i can see where you got that.
no matter what when this goes to a tax man i'd like to hear the verdict.
just last week on the 30th we were still trying to postion ourselves for taxes. i hate to admit this ,but i plan my life around taxes. sometimes this gets in the way,but i hate seeing my irs partner get 30% of the profit and i do all the work,if he came over once in awhile while i cleaned a sewer line i'd share.......
i use the 1031 tax deferred every chance i can because of this.but it won't help you on this deal unless you figure out a way to call it investment. if there is a way there, i can think of a way to go with it.
YOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
Edited 1/3/2009 11:15 pm by alwaysoverbudget
We definitely didn't plan this around taxes, but it sure seems worth exploring. We won't be selling til may at the earliest, but if I remember to, I'll post the results then. (of course, I'll probably be posting the audit results in another year...)
k
ps- and fwiw, even with all these ridiculous figures flying around, I'm still a broke ditch digger, btw. something about the two mortgages and trying to hang onto the house all through the nineties while I was in school... ruined my credit, paid the mortgage on credit cards, etc... I'll do ok in the end, but I drive a 23 yr. old truck, my boots are blown out, and I probably lost decades off my life being on the edge of foreclosure for years. I don't want anyone to get the wrong impression.
i know some think numbers like that are crazy,i'm out here in the flatlands,and we all hear the cailf stories of everyones getting rich on re out there. i mean if you bought a house here in the early 90's for 100 it's probably worth 145. now. so your appreciation seems out of this world.
but i know that unless you are moving to kansas that if you sell you have to go down the street and buy another one,so it all becomes a mute point. we have the advantage of in this down market of only going down 25k versus you guys out there of 250k. i swear i don't think i could sleep at night with swings that wide.here about 2 years ago that was a trend we saw. 50's couples sold their house and came back here and retired on those funds. probably pretty smart thinking. i can't guess how much property taxes etc are there.
keep us informed on how the audit goes,i think the jail has internet connections.....
YOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
I have to laugh whenever I see a headline about "the California real estate market". That'd be like lumping the east coast from DC to Florida in one category.
You know, I did the math on my house in 2005, and came up with approx 8% a year appreciation. Good, solid return, but not the 25% I kept reading about. The media focused on a few markets on the way up, and now they're focusing on a few on the way down. The reality is a lot more boring, in most cases.
I'm glad you got my main point about the crazy dollar figures not neccesarily meaning anyone is living any better than anyone else. In fact, around here, most of us are so busy chasing our tails to not lose ground you'd feel bad for us if you saw what our moment to moment reality was.
k
i thought of something last night that might work for you if you can't roll your wifes exemption to your gains.
first are you thinking of buying another house there?
back in the dark ages,like 92 or something we didn't have this exemption on your own personal house. if you sold your house ,made a profit ,you paid taxes on that. UNLESS you bought a house within 2 yrs[ might of been 1] that cost as much or more than the one you sold. this encourage everyone to replace and move up.
i believe this is still on the books but once the exemption came up most people never need to do this,they just take the exemption and go buy the next house no matter what the cost factor is relating to the old one.
so if you and your wife sold,used this rule,moved into the next one lived there a couple years as joint owners,then sold,i would guess you could then take the exemption and no one would ever question it about who's half is who's.
just a idea.YOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
The old rollover deferrment. If I remember correctly it was a deferrment- when you sold that last house (20 upgrades later) and moved into the retirement home (or the ground) you had to settle up with the IRS. The benefit was you got to play with the deferred tax $ interest free in the meantime.
But anyway, no, we're not buying in the next couple of years, as far as I can tell.
k
You will be well past the two year mark when (if) you sell.
My guess is you have zero tax liability on the sale.
One free guess, two left.
Joe H
but can an individual take multiple exemptions on the same property? If you had an infinite amount of capital gain, could you sell percentages of the property every two years, taking the exemption each time?
I'm counting more on the married/joint ownership angle, but if the above situation is the case, maybe it doesn't matter.
I'll be talking informally with a tax attorney today, I'll report back on what he says, FWIW.
k
I suspect that you won't have any problem from this sale.But the first sale might be questioned.In a lot of the tax code there are limitation on sales to related persons as it is a good chance for "inside dealing" and giving false gains, losses, and cost basis.You need someone that can can access the tax court rules, private letter rulings, and other background information..
William the Geezer, the sequel to Billy the Kid - Shoe
Interesting that both you and the previous poster, edharrison are looking at the first sale. I'll admit that hadn't even registered as a concern to me- I guess because I know there was no sneaky intent, but of course my understanding of our motives doesn't carry a lot of legal weight...
FWIW, we had a licensed appraisal, re-registered the deed, etc. We were seriously dating, but the thought that we might choose to go our separate ways was considered, and it was well understood that we'd split the proceeds 50-50 if that happened (which obviously did not).
Given the community property issue, however, the 50-50 ownership does get muddied, I suppose.
My wife and I have individual accounts in addition to our shared monies. I wonder if the fact that her 50% of the sale proceeds will go into her private account will eliminate suspicion.
I will clearly need to pay an attorney on this one, but I always like to gather an understanding of the general issues first- those guys bill by the hour, after all.
Thanks for the attention!
k
My advice would be seek out a tax attorney and not an accountant. Your gonna need someone who will be able to defend this in court.
Yeah, you're probably right. Although, there has to be precedent for this somewhere.
k
I'm no tax expert but, thought you could sell every two years with no cap gains unless over $500K?
Joe H
I'm no tax expert but, thought you could sell every two years with no cap gains unless over $500K?
I think that's correct, 500k for married couples, 250k for singles.
But in this case it'd be selling partial ownership of the same property twice, so I don't know what the rules are.
k
Surprise, surprise, the "free legal advice" from the licensed tax attorney never materialized.
I'll keep you posted.
k
I'm not a licensed tax attorney but I can tell you that you're talking about a "Section 121 Sale of Residence Exclusion" not an "exemption." I think you're fine with the exclusion tests. I believe that the "use and frequency" tests reset in 2006 when you got married and that you meet them and can exclude up to 500K gain. I think you're right in that your basis was reduced, but your wife has a basis in the amount that yours was reduced, plus any settlement fees, etc., so I believe that according to the rules it would basically be a wash.A bigger problem is the fact that you live in a community property state and the wife put a bunch of cash into what became your marriage's community property just before you got married, in the form of nominal home ownership in a home that you already owned. You said her money trail is "clean" and it came from a rich dad - an IRS examiner might have some questions about that. It might look like somebody was avoiding paying gift tax. But that and 75 cents will buy you a cup of coffee. I can tell you I've got a pretty spotty record of predicting exactly what the IRS would do. With the amount of money involved, you should certainly seek the advice of a tax attorney. It would be worth spending a couple hundred bucks to do so.Good luck, Ed"Yes, but what's good for me ain't necessarily good for the weak-minded." - Augustus McCrae, Lonesome Dove