Ask the tax adviser
Taxes on a home sale
Dear Tax Talk:
My girlfriend and I purchased a home, and we have broken up. She
is buying me out for $12,500. Is there anything I can do so I don't
have to claim that money as income and pay taxes on it?
Although you lost your home and your girl, you probably won't lose
your money to the Internal Revenue Service.
While a married couple definitely would not pay tax
on a property split such as this, you were not married so you have
to look at the rules relating to home sales. If you lived in and
owned the home for at least two of the last five years, you won't
have to pay tax as you can claim the exclusion that applies to the
sale of your home. That is, an individual who meets this time frame
does not have to pay tax on up to $250,000 in gain from the sale
of a home.
Gain in your case would be measured by not only the
amount of cash you receive, but also by the amount of debt that
you're relieved of. For example, if you're receiving $12,500, plus
being released from your half of, say a $100,000 mortgage, your
selling price is actually $62,500. To determine your gain, you would
figure how much you paid for the house, including the mortgage.
For example, if you jointly paid $10,000 down and took out a mortgage
for $110,000, your cost would be $60,000, thereby giving you a gain
of $2,500. Since the gain is less than the exclusion, you don't
owe any tax.
If you don't meet the time test, then you would need
to report the gain on the sale of the property to your ex.
-- Posted: April 2, 2002