save money by selling shared property
Posted on May 22, 2016
Save money by selling shared property
Q. I’m getting divorced. During the marriage, we bought several pieces of property. What kinds of things do I have to watch out for, tax wise?
A. 26 U.S. Code, Section 1041 provides that all exchanges between spouses during the marriage, at the time of divorce, or transfers made in connection with the divorce, are tax-free.
Assume your husband is going to transfer title to a condominium unit that is now worth $1 million and that it was bought for $300,000. You will not now have to pay a tax on that $700,000 gain. But when you sell that condo, you’d have to declare and pay taxes on a $700,000 long-term capital gain.
Assume that, after buying that condo, you folks spent $200,000 to fix it up. Then, if you sold the condo, because your basis would be $500,000, the capital gain goes down to $500,000.
And, if at the time of sale, that condo is still owned by both of you and still meets the primary residence rule, then neither of you would have to pay either the Federal (20 percent) or Massachusetts (5.25 percent) capital gains tax – a savings of $126,250. So you should be sure your separation agreement requires immediate sale of that condo and that your husband immediately gives you all of his share of the net sale proceeds. Also - because that is a transfer in connection with the divorce – it is not a taxable event. The best tax advice is to sell that condo, even if you love it, because you’ll save $126,250! Then you can buy a new home that will have a $1million dollar tax basis.
You need to get professional appraisals or the current fair market value of each asset. Then, to determine the net value of each asset, deduct all liens, mortgages, and other encumbrances, such as unpaid real estate taxes. Figure out the cost basis of each property to determine the imbedded tax consequences. Make sure you end up with one-half of the total net worth – whether in cash or assets with similar tax basis. Of course, in addition to hiring top-rated appraisers and accountants, you also need a top-rated divorce lawyer.
If your husband wants to keep all the property and pay you your share over time, get a mortgage on all the property. Be sure he makes monthly payments of interest, or interest and principal, on the unpaid portion of the loan.
Then if he doesn’t pay, you can foreclose, get the property back, and then sell it to the highest bidder. Sweet!
If you go for the mortgage deal, never, ever agree to
refinance that loan. Instead, make him get a bank loan
and pay off your full balance—‘tis better to be safe and
secure than getting outfoxed by an ex-spouse.