Tax basis implications when buying out ex-spouse's share of property after divorce

Wait, so the ex-wife doesn't get to claim a loss for selling her half for less than she paid? Does she have any tax implications from this transaction at all? And what if the property was an investment property rather than a primary residence?

Correct, the ex-wife generally cannot claim a capital loss on this transaction because transfers related to divorce fall under Section 1041, which treats them as gifts with no gain or loss recognized. This applies regardless of the amount received compared to her original investment. If the property was an investment property rather than a primary residence, Section 1041 would still apply to the transfer between divorcing spouses. The tax treatment of the basis would be the same. The primary difference would emerge later - if your father sells the property, he wouldn't qualify for the Section 121 exclusion for a primary residence, and would potentially owe capital gains on any appreciation over the combined basis of $380k.

Did this actually help with the specific question about primary residence requirements? I'm in a somewhat similar situation but also wondering if living in the property part-time would count toward the 2-year requirement or if I need to be there full-time.

I'm skeptical about these online tools. Did they actually give you specific advice or just general information you could find on the IRS website? Because calculating basis in divorce situations can get really complicated when there's debt involved or improvements made to the property.

Yes, it absolutely helped with the primary residence question. They explained that the IRS looks at several factors to determine if a home qualifies as your primary residence - including where you spend most of your time, where you're registered to vote, your mailing address, etc. It doesn't require literally living there 100% of the time, but it does need to be your main home. Regarding your skepticism, I was surprised by the specificity. It wasn't just generic information. After uploading my documents, I received personalized guidance addressing my particular situation, including how to handle the mortgage we had refinanced and the bathroom remodel we'd done. It was definitely more detailed than what I found searching online forums or the IRS website.

How does this service work exactly? Do they just call the IRS for you? Seems like something I could do myself if I just kept trying.

This sounds completely made up. The IRS agents don't give specific tax advice like that - they only provide general guidance. And there's no way they got you through in 15 minutes when thousands of people are calling every day. This has to be some kind of scam.

They use a technology that automatically navigates the IRS phone tree and waits on hold for you. When they actually get a human on the line, they call you and connect you directly to the IRS agent. So you only need to be on the phone for the actual conversation part, not the hours of waiting. You're right that IRS agents won't give specific tax advice like "here's how you should file," but they will clarify how tax laws apply to specific situations, which is exactly what I needed. They explained how Section 1041 works in transfer situations like mine and confirmed the requirements for the primary residence exclusion. I found their guidance incredibly helpful for understanding my options, even if they didn't tell me exactly what to do. Nothing scammy about it - just saved me hours of hold music and frustration.

Thanks for the reminder! What kind of documentation would be most important to keep? Dad has the divorce decree, but it only mentions how they'd split proceeds if they sold - nothing about one buying out the other. They did do a quitclaim deed when he paid her. Should he get something more formal for tax purposes?

The quitclaim deed is good, but he should also keep copies of the payment proof (canceled check, wire transfer confirmation, etc.) and any written agreement they made about the buyout even if it was just emails. A formal buyout agreement would be ideal, but at minimum he needs documentation showing the amount paid and that both parties agreed to it. It would also be helpful to have an appraisal or market analysis from the time of the buyout to establish the property's fair market value when the transaction occurred. This helps establish that the buyout was a fair market transaction. If your dad moves back in, he should keep records proving it's his primary residence - utility bills, driver's license, voter registration, etc. all showing that address.

That's a really good point about timing! The post says the property wasn't specifically addressed in the divorce decree though. Would that make a difference? Also, does anyone know if the primary residence rule is different for properties acquired during a short marriage?

You raise an excellent point about the timing! The "incident to divorce" requirement is crucial here. However, there's actually a broader interpretation - transfers can qualify under Section 1041 if they're "related to the cessation of the marriage" even if they occur more than a year after the divorce decree. The key factor is whether the transfer is pursuant to the divorce or separation. Since the original post mentions the property division wasn't specifically addressed in the settlement agreement, this buyout could still qualify as divorce-related if it's resolving the property division that was left unfinished. Courts have been fairly generous in interpreting what constitutes "related to cessation of marriage." @dfd231547dac Regarding your question about short marriages and primary residence rules - the length of the marriage doesn't affect the primary residence exclusion requirements. The 2-out-of-5 year rule still applies regardless of how long they were married. The timing starts from when he actually uses it as his primary residence, not from the marriage or divorce dates.

This is really helpful comprehensive advice! I'm dealing with a somewhat similar situation but wondering about one specific detail - what happens if there were significant improvements made to the property between the original purchase and the buyout? In my case, we renovated the kitchen for about $25k after buying the house but before separating. Does that get added to the $380k basis, or does it complicate the Section 1041 treatment? I'm trying to figure out if improvements made during the marriage affect how the basis transfers in a divorce buyout situation. @5d89d93fd609 Do you know if the timing of when improvements were made matters for basis calculation purposes?

@08070f1f4358 Great question about improvements! Under Section 1041, improvements made during the marriage would typically be added to the basis. So in your case, the total basis would likely be $405k ($380k original purchase + $25k kitchen renovation). The timing of improvements does matter, but since your renovation happened during the marriage while both spouses owned the property, it should increase the total basis that transfers under the divorce rules. This applies regardless of which spouse physically paid for the improvements - marital property concepts generally treat improvements as benefiting both spouses' ownership interests. However, you'll want to keep detailed records of the improvement costs (receipts, contractor agreements, permits, etc.) since the IRS may scrutinize these additions to basis during any future audit. The key is being able to prove these were legitimate capital improvements rather than just repairs or maintenance. @5d89d93fd609 's advice about consulting a tax professional is especially important when improvements are involved, as the documentation requirements can be quite specific.

@53e30ed04c48 You bring up a really important point about mortgage debt that I hadn't considered! This could definitely complicate the tax treatment. If there was an outstanding mortgage and the father assumed the ex-wife's portion of that debt, would that change his basis calculation? Or would the IRS treat the debt assumption as separate from the $95k cash payment? I'm also curious about something - if he moves back in to start the 2-year clock for primary residence, does he need to maintain it as his PRIMARY residence for those 2 years, or can he have it as a secondary residence while keeping another primary residence elsewhere? The distinction seems important for someone who might be staying with family temporarily but wants to preserve the tax benefits. This whole thread has been incredibly educational about divorce property transfers - there are so many nuances I never would have thought about!