Tax Implications of buying an unmarried partner out of a house - capital gains question

Good news! You're probably on the right track. The IRS has what's called the Section 121 exclusion, which lets you exclude up to $250,000 of capital gain on the sale of your primary residence if you've owned and lived in it for at least 2 out of the 5 years before the sale. Since you've lived there for about 3 years, you likely qualify. The fact that you're selling to your ex (rather than a third party) doesn't change how it's treated for tax purposes - it's still considered a sale. The capital gain would be calculated as the difference between your original basis (what you paid for your portion) and what you're receiving ($27K). One thing to consider - make sure you document everything properly. Get a proper buyout agreement in writing, and consider having the property appraised to establish fair market value. Also, make sure the title is properly transferred to remove your name. Although this sounds straightforward, it might be worth consulting with a tax professional who can review your specific situation, especially if the property has appreciated significantly.

I went through something similar last year and thought I'd share what helped me. I used taxr.ai (https://taxr.ai) to analyze my situation when my ex bought me out of our condo. Their system helped me figure out exactly how the Section 121 exclusion applied to my specific situation and identified some documentation I needed to keep for my records. The process was super simple - I uploaded my purchase documents, the buyout agreement, and they analyzed everything and gave me a clear breakdown of the tax implications. It took the uncertainty out of the situation and gave me peace of mind going into tax season.

Just wanted to update - I tried taxr.ai after seeing it mentioned here and it was exactly what I needed! I was confused about how to handle the buyout from my ex-partner on our vacation property, especially since I had only owned it for 18 months. The system immediately identified that I didn't meet the 2-year requirement for the full Section 121 exclusion, but it showed me that I qualified for a partial exclusion based on our circumstances. It saved me from making what would have been a pretty expensive tax mistake. They even generated a detailed report that I can provide if I'm ever audited. Definitely give it a try if you're in this situation - cleared up all my confusion about calculating capital gains on a partial interest sale.

Hey, I notice a lot of people here talking about the tax implications, but don't forget about getting your name off the deed and mortgage! I tried for WEEKS to reach the Illinois Recorder's Office and my bank to handle this when my partner bought me out. Complete nightmare. After wasting hours on hold, I found Claimyr (https://claimyr.com) and they got me connected to actual humans at both offices within minutes. Check out how it works in this video: https://youtu.be/_kiP6q8DX5c Seriously, it saved me so much frustration. The county office walked me through exactly what forms I needed, and the bank representative helped me understand what they required to remove me from the mortgage. Don't underestimate how complicated the non-tax parts of this process can be!

I'm back to admit I was completely wrong about Claimyr. After expressing my skepticism, I decided to try it when I needed to talk to the IRS about my ex-partner buyout situation. I needed clarification on some paperwork requirements since our situation was complicated by some rental income from the property. The service connected me to an IRS representative in about 35 minutes, when my previous attempts had resulted in "call volume too high" messages and disconnections. The agent walked me through exactly how to document the partial sale for tax purposes and confirmed what forms I needed. I'm actually shocked at how well it worked. Definitely worth it when you need to talk to a human at these agencies quickly. Sorry for being so dismissive before.

Make sure you get everything in writing! My ex and I did a similar buyout last year, and even though we were on good terms, having a formal agreement saved us from misunderstandings. We had a real estate attorney draft a simple buyout agreement that specified: 1. The agreed value of the home 2. How my equity was calculated 3. Timeline for payment 4. Process for removing me from the deed and mortgage The attorney fee was only about $600 and well worth avoiding problems later. Also, keep all documentation showing the original purchase price, any major improvements you've made (which increase your basis), and the final settlement. You'll need this if you're ever audited.

Has anyone dealt with this situation when you've lived in the house less than 2 years? My girlfriend and I are in a similar situation but we've only owned our place for 14 months. Does that mean I'll definitely have to pay capital gains?

One thing I haven't seen mentioned yet is the importance of understanding how your mortgage payments and improvements affect your basis calculation. Since you've been living there for 3 years, you'll want to track not just your original down payment, but also the portion of your mortgage payments that went toward principal (not interest), any closing costs you paid, and documented improvements you made to the property. For example, if you put down $20K initially, paid $5K in principal over 3 years, and spent $3K on improvements, your basis would be $28K. If you're getting $27K in the buyout, you might actually have a small loss rather than a gain, which means no capital gains tax at all. Keep detailed records of everything - bank statements showing mortgage payments, receipts for any improvements (new flooring, appliances, etc.), and your original closing disclosure. The IRS defines improvements as things that add value to the home, extend its useful life, or adapt it to new uses - not regular maintenance and repairs. Also, don't forget that you can include certain selling expenses in your basis calculation, like any legal fees for the buyout agreement or title transfer costs. These can help reduce any potential taxable gain.

One additional consideration that hasn't been mentioned - make sure you understand the timing implications for your 2025 tax filing. Since this buyout is happening this year, you'll need to report it on your 2025 tax return (filed in 2026). If you're planning to move after the buyout, be aware that the Section 121 exclusion is a once-every-two-years benefit. So if you buy another home and need to sell it quickly for any reason, you won't be able to use the exclusion again until 2027. Also, since you're in Illinois, double-check if there are any state-specific forms or requirements. While Illinois generally follows federal tax treatment for capital gains, it's worth confirming there aren't any additional state reporting requirements for property transfers between unmarried partners. The fact that you've lived there as your primary residence for 3 years puts you in a good position with the federal exclusion, but documenting everything properly now will save you headaches next tax season.

I just want to emphasize how important it is to get proper documentation for everything, especially since you mentioned this is a breakup situation. Even if things are amicable now, having everything legally documented protects both of you. A few things I learned from my own similar situation last year: 1. Get a formal property appraisal - don't just rely on online estimates or comparable sales. The $500 cost is worth it to establish an indisputable fair market value. 2. Have a real estate attorney draft a buyout agreement that clearly states the property value, your equity calculation, payment terms, and timeline for deed/mortgage changes. This isn't just for legal protection - the IRS may want to see this documentation if they ever question your capital gains calculation. 3. Keep every receipt and document related to your ownership: original purchase documents, mortgage statements showing principal payments, receipts for any improvements (even small ones), and records of shared expenses. 4. Consider the timing carefully. Since you qualify for the Section 121 exclusion, you're in good shape tax-wise. But remember you can only use this exclusion once every two years, so if you're planning to buy another place soon, factor that into your decision-making. The fact that you've lived there for 3 years puts you in an excellent position with the federal exclusion, and since Illinois follows federal treatment, you shouldn't have additional state complications. Just make sure everything is properly documented now to avoid headaches during tax season.