How is house basis calculated after buying out ex-spouse in divorce?

This is a really good question that comes up frequently in divorce situations. The tax basis treatment in a divorce buyout is actually different than what you're thinking. When you buy out your ex-spouse's interest in the home as part of a divorce settlement, you're essentially receiving their share of the property in what's considered a non-taxable transfer incident to divorce (under IRC Section 1041). Because of this, you don't get to add the buyout amount to your basis. Instead, you inherit their portion of the existing basis. In your case, your basis would remain $690,000 (the original basis) - not $1,015,000. This means if you sell the house at its current market value of $1,050,000, you'd potentially have a capital gain of about $360,000 (minus selling costs). The good news is that if you use the home as your primary residence for at least 2 of the 5 years before selling, you might qualify for the Section 121 exclusion, which allows you to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from your income.

After reading all this tax stuff about divorce and houses, I wanted to share my experience using https://taxr.ai when I was going through something similar last year. I had all these documents from my divorce - property valuations, settlement agreements, old tax returns - and couldn't figure out how it affected my tax basis. I uploaded everything to taxr.ai and it analyzed all my documents, explained what my new basis would be, and pointed out a special tax situation in my settlement agreement I hadn't even noticed. Saved me from making a $18,000 mistake on my taxes! They even explained how the home sale exclusion would work in my specific timeframe.

I just wanted to update everyone. I decided to try taxr.ai after my skeptical comment and I'm actually really impressed. I uploaded my divorce decree, settlement agreement, and home purchase documents from 10 years ago. The system broke down exactly how my basis transferred and even identified a substantial home improvement I'd made in 2018 that I forgot to add to my basis calculation. What really surprised me was how they explained the "use and ownership" test for the $250,000 capital gains exclusion in my specific situation. Turns out I didn't have to wait as long as I thought to sell without a big tax hit. Just closed on my house last month and didn't have to pay any capital gains tax!

For anyone dealing with tax questions after divorce, I hit a wall trying to get answers from the IRS when I was in a similar situation last year. After being on hold for HOURS multiple times and getting disconnected, I found https://claimyr.com and used their service to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally spoke with the IRS, they confirmed exactly what the first commenter said - in a divorce, you take over your ex's basis, you don't add the buyout amount to your basis. They also helped me understand some special rules that applied in my situation about recapturing depreciation since we had used part of our home for business.

I need to eat my words from my previous comment. After another week of failed attempts to reach the IRS about my divorce property transfer situation, I broke down and tried Claimyr. Within 47 minutes (they have a tracker that shows your progress), I was talking to an actual IRS representative who answered my specific questions about basis adjustment in divorce. The agent confirmed that I could document substantial improvements made during the marriage to increase the basis before calculating the divorce split. She also explained a special rule about partial business use of the home that applied to my situation. Honestly, I'm still surprised it actually worked, but it saved me what would have probably been another month of frustration.

One thing nobody's mentioned yet is that you should check if you and your ex made any home improvements during your ownership. Those get added to your original basis! So if you bought at $690k but then did a $50k kitchen renovation and $30k of other improvements, your actual basis might be $770k. Keep in mind that regular maintenance doesn't count - has to be improvements that add value. Get those receipts together because they'll help reduce any potential capital gains when you sell.

Kinda unrelated but make sure you refinance the mortgage completely into your name as part of this process!!! My ex kept the house, "bought me out" but we never removed my name from the mortgage. Three years later she stopped making payments and my credit was completely destroyed. The bank didn't care about our divorce decree - I was still legally responsible for the mortgage.

One other thing to consider - if you've been depreciating any portion of your home (like a home office), that complicates things further. When you sell, you'll have to recapture that depreciation regardless of the $250k exemption. I learned this the hard way and got hit with a surprise tax bill. Make sure you talk to a CPA who specializes in divorce and real estate.

Just wanted to add another perspective on the refinancing point that @Laila Fury mentioned - this is absolutely critical and often overlooked. When I went through my divorce, my attorney initially said we could handle the mortgage transfer later, but I'm so glad I insisted on making it part of the settlement. The refinancing process can actually be more complicated than people expect, especially if your income alone doesn't qualify for the full mortgage amount. I had to provide extensive documentation about my ex's buyout payment and how it affected my debt-to-income ratio. Some lenders wanted to see the divorce decree, settlement agreement, and proof of funds for the buyout. Also, don't forget about homeowners insurance - you'll need to update the policy to remove your ex-spouse and make sure you're the sole named insured. I almost missed this step and it could have created coverage issues if something had happened to the house. The whole process took about 6 weeks for me, so factor that timing into your divorce timeline. You don't want to be stuck in limbo where you're responsible for the house but your ex is still on the mortgage.

Something else to keep in mind - if you decide to rent out the house later instead of selling, the tax treatment changes completely. Once you convert it to a rental property, you'll need to start depreciating it, and your basis calculation becomes more complex. Also, make sure your divorce attorney and tax professional are communicating about the language in your settlement agreement. While the IRS generally treats all transfers incident to divorce the same way regardless of wording, having clear documentation about the property transfer can help avoid confusion later. One more tip: if you're planning to sell within a few years, consider timing the sale carefully. You need to live in the house as your primary residence for 2 out of the 5 years before selling to qualify for the $250k capital gains exclusion. So if you move out, keep track of those dates!

I went through a very similar situation about 3 years ago and want to emphasize how important it is to get everything documented properly from the start. Everyone's covered the basis calculation correctly - you'll keep the $690k basis even after paying the buyout. One thing I wish someone had told me: make sure you get a formal appraisal done as part of your divorce proceedings, not just a CMA or Zillow estimate. I used a comparative market analysis to determine the buyout amount, but when I sold the house 2 years later, the IRS questioned my capital gains calculation because I didn't have professional documentation of the value at the time of divorce. Also, start organizing all your home improvement records NOW while you're thinking about it. I spent weeks going through old bank statements and credit card records trying to reconstruct $40k worth of improvements we'd made over 8 years. Even found some contractor invoices in old email accounts I'd forgotten about. Every dollar of documented improvements will reduce your eventual capital gains. The $250k exclusion is a lifesaver if you qualify, but remember you need to actually live in the house as your primary residence for 2 of the 5 years before selling. Don't just keep it as your mailing address - the IRS looks at where you actually sleep most nights.

I've been following this discussion as someone who went through a similar divorce buyout situation last year. One aspect that hasn't been fully covered is the importance of timing your divorce finalization if you're planning to use the $250k capital gains exclusion. In my case, my divorce was finalized in March, but I had already been separated and living apart from my ex for over a year while we worked out the settlement. The IRS looks at when you actually stop using the home as your primary residence, not just when the divorce is legally final. This meant my "2 out of 5 years" clock was already ticking from when I moved out during our separation. I ended up having to sell sooner than I wanted because I was approaching the deadline to qualify for the exclusion. If you're currently still living together in the house, you're in a better position timewise than I was. Just something to keep in mind as you finalize your plans - the separation date can matter as much as the divorce date for tax purposes. Also, to echo what others have said about improvements - don't just look for big renovation receipts. We found basis adjustments for things like a new HVAC system, replacement windows, and even major appliance installations that were built-in (like a new water heater). Every legitimate improvement counts toward reducing your eventual capital gains.