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Dear Tax Talk,
My husband and I bought a house in 2000 for $500,000. Now we are getting divorced. I want to buy him out of the house. I am buying his portion for $600,000 based on a $1.2 million price for the house. My question is, in the future when I sell the house, will my capital gains on the house be based on $1.2 million or based on $500,000? Thank you for your time.
Your capital gains on the house will be based on 2 separate components because you acquired 50% of the home when you and your husband initially purchased it, and then another 50% when you purchased your husband’s share as part of your divorce settlement.
Based on the information you have provided, your cost basis in the home will be $850,000, calculated as follows:
- $250,000, which is 50% of the original purchase price,
- $600,000, which is the amount you are paying your husband for his 50% share of the house.
Don’t forget that you can also factor into your cost basis any major capital improvements you make to the property during the time you are an owner. Just make sure you allocate them between the time you and your husband jointly owned the property and the time when you became the sole owner.
For instance, if you and your husband added a new swimming pool at a cost of $40,000 after the 2 of you purchased it, then you would add $20,000 (50% of $40,000) to your cost basis. Alternatively, if you buy out your husband’s share and then spend $40,000 on a new pool, you would add $40,000 to your cost basis.
Qualifying for capital gains exclusion
In the future, if you sell your home and you meet the IRS requirements, your sale may qualify for excluding $250,000 of capital gains ($500,000 if married filing jointly) if you owned the home and used it as your main residence for at least 2 of the 5 years before the sale date.
There are other requirements listed in IRS Publication 523, Selling Your Home, so be sure to go over everything if and when you do sell your home.
Thanks for the great question and all the best to you in moving forward with your new life.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.