Tax on home proceeds in a divorce

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Dear Tax Talk,
I recently received proceeds from my ex-wife when she bought me out of our house, as part of the divorce agreement. I lived in the home for approximately 10 years. As we approach the end of the calendar year, will this income be considered taxable income?

Thanks,
— Mike


Dear Mike,
There is no gain or loss recognized on the transfer of property between spouses, or between former spouses if the transfer is because of a divorce. If you sell property to satisfy a property settlement, then you may have a gain or loss to report.

However, in your case you are not considered to be selling your one-half interest in the home to your spouse. Instead, it falls within the purview of the general rule that no gain or loss is recognized in property settlements incident to divorce.

In the case of an unmarried couple, the same would not be true. In that case, the partner in the relationship receiving the proceeds would be considered selling the property. If it was the principal residence, the unmarried partner could apply the $250,000 gain exclusion. Since you are not recognizing gain on the transfer to your wife, she does not get to adjust her cost in the property. But that’s her problem now, isn’t it?

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