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 Dear
Tax Talk,
I am legally separated, not yet divorced. Our current
home is all paid off, so my wife is paying me $250,000 to buy me out of the house.
I believe there should be no gain or loss involved in this case. Is this correct?
Also, do I need to inform the Internal Revenue Service at
the end of the year so they know what happened and I won't get in trouble later
on? Is there anything I need to do now to inform the IRS about this event? Thanks.
-- H
 Dear
H,
At least you're not leaving empty-handed. The
general rule is there is no recognized gain or
loss on the transfer of property between spouses,
or between former spouses if the transfer is incident
to a divorce. This rule applies even if the transfer
was in exchange for cash. A property transfer
is incident to your divorce if the transfer either:
- Occurs within one year after
the date your marriage ends.
- Is related
to the ending of your marriage.
Your parting gift to your spouse
is that she's stuck with the cost basis in your
home when she later sells. Because you're not
recognizing gain on the transaction, the $250,000
she is paying you for the value of the home does
not increase her cost basis in the home. For example,
if you bought the home for $200,000 and it is
now worth $500,000, her basis for computing gain
will still be $200,000 even though it cost her
more than that.
There are no special reporting requirements
as a result of divorce or the transfer of cash
or property from one spouse to the other. Once
you're divorced, I am sure you'll get in trouble
later, but not with the IRS.
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