7

To be clear, this is a question about US Federal Taxes, and I live in Virginia, which is an equitable property (not community property) state. Additionally, I understand this is not a legal forum wherein I can get legal advice. I just want the general idea, so that when I go to my lawyer and/or accountant, I have an idea of what to expect.

So, my soon-to-be ex-wife and I have an exceedingly expensive house with a lot of equity in it. As part of the divorce settlement, I am going to be bought out of my share of the equity. The question is, is this payout taxable income, or just a redistribution of my portfolio? I'm assuming that in many ways, the buyout would be treated as if I were selling the house, but the happiest answer I could receive is, "No - it's not."

So, what's the deal then - is a buyout a sale subject to capital gains, or is it just a reshuffling of assets?

  • 2
    Just a side note, but the one-time capital gains exclusion hasn't existed since 1997. In its place, homeowners can exclude capital gains multiple times in their life if they meet certain eligibility requirements. – John Bensin Jul 25 '13 at 15:24
  • Will the answer depend on whether you live in a community property state or not? In any case, please consider revealing the state of which you are a resident, and possibly the state in which the house is located in, if that is different. – Dilip Sarwate Jul 25 '13 at 16:43
  • Good question, not legal. – JoeTaxpayer Jul 25 '13 at 19:06
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The transfer of property between spouses, or between ex-spouses incident to divorce, is not generally a taxable event.

The controlling section is IRC §1041. If the divorce agreement includes cash for transfer of the house, then it's not likely to be taxable. This rule would not apply, however, if your ex-wife is a nonresident alien (and thus the property would skip tax when it left the US tax-free).

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So, what's the deal then - is a buyout a sale subject to capital gains, or is it just a reshuffling of assets?

It is subject to capital gains, of course. There's no "in-kind" exchange for personal residence.

What there is, however, is primary residence exclusion.

If you transfer the property to your wife before the divorce, the answer might be different, but having it non-taxable to you will make it taxable for her, and I'm not sure she'd like it.

Community property rules, if apply, may change your basis - making the profit higher or lower than you think.

I'm sure the accountant helping you with the divorce can give you a formal opinion on this, I'm not a professional.

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    It's not taxable. §1041 excludes it from income if it's between spouses or incident to divorce. If it's in the divorce settlement, then the transfers of values are tax free - as if made between spouses. – NL7 Apr 16 '14 at 18:49

protected by Chris W. Rea Mar 12 '17 at 17:40

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