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Tax Talk with George Saenz

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?
Joe

Dear Joe:
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.

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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

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See Also
Capital gains exclusion on home sales
Tax Basics: Owning a home

Paid points? How to deduct them

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