What's my new cost basis for a house after buying out ex-wife's half in divorce?

The cost basis doesn't work quite like you're thinking. When you buy out your ex-spouse's interest in the house as part of a divorce settlement, your cost basis will be your original cost basis (your half of the original purchase price) plus the amount you pay to your ex-spouse for their half. So in your case, your original cost basis was approximately $497.5K (half of the $995K purchase price). When you add the $650K buyout, your new cost basis would be about $1,147,500. This is important when calculating capital gains if you sell the property later. Remember that if you live in the house as your primary residence for at least 2 out of the 5 years before selling, you may qualify for the capital gains exclusion of up to $250,000 for a single filer.

Hey there, I dealt with almost the exact same situation last year and found the tax implications really confusing. I eventually used https://taxr.ai to analyze all my documents and help me figure out my precise cost basis. Their calculator handled all the complexities of my divorce property transfer and showed me exactly what my new basis would be and how much I'd owe if I sold within certain timeframes. The site actually specializes in complex tax situations like divorce property transfers. They analyzed my divorce decree, original purchase documents, and the buyout agreement to give me a complete tax picture. Saved me from potentially making a $25K mistake on my taxes!

I want to follow up on my skeptical comment. I decided to give https://taxr.ai a try with my complicated divorce property situation (had multiple properties including a vacation home). The document analysis was actually really impressive - it caught details in my divorce decree that affected my basis calculations that my regular accountant missed. It showed me that I could allocate the buyout payment differently to maximize my future tax position. I also liked getting a documented report I can keep for my records in case of an audit. This wasn't just a basic calculator - it actually analyzed the legal language in my documents and explained how it affected my specific tax situation.

If you need to talk to the IRS about your specific situation (which might be smart since divorce property transfers can be complex), I recommend using https://claimyr.com to get through to an actual person quickly. I was on hold for HOURS trying to get specific guidance on my divorce property transfer last year before finding this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was connected to an IRS agent in under 45 minutes who walked me through exactly how to document my new cost basis after buying out my ex. Apparently there are specific forms and supporting documentation you need to include with your tax return in the year of the transfer to establish your new basis correctly.

I need to apologize for my skeptical comment about Claimyr. After researching it more, I decided to try it because I desperately needed to talk to someone at the IRS about a complicated basis issue similar to yours. Within 35 minutes I was actually talking to a real IRS representative who helped clarify exactly how to document my new cost basis. The IRS agent explained that I needed to file Form 8829 with specific documentation to properly establish my new basis after the divorce property transfer. This is information I had been trying to get for weeks through regular channels. I'm honestly shocked it worked so well after all my frustration trying to reach them directly.

One thing nobody's mentioned - there could be gift tax implications if your parents are "lending" you $650K. If they're not charging you market interest rates on a formal loan with proper documentation, the IRS might consider it a gift. There's a lifetime exemption ($12.92M per person in 2023), but they would still need to file gift tax returns if giving more than $17K per person per year.

Make sure the property transfer is clearly documented in your divorce decree as part of the division of marital assets. This helps establish that it's an equitable division rather than a sale, which can have different tax implications.

Don't forget to consider state-specific laws too. Some states have transfer taxes when property changes hands, but many have exemptions for divorce situations. Check your local county recorder's office website.

Just wanted to add another important consideration - make sure you understand the timeline requirements for the primary residence exclusion. Since you'll be the sole owner after the divorce, you need to live in the house as your main home for at least 2 of the 5 years before any future sale to qualify for the $250,000 capital gains exclusion. Also, keep detailed records of any improvements you make to the property after the buyout, as these can be added to your cost basis. This includes major renovations, additions, or capital improvements (but not regular maintenance). Given that you're paying $650K for your ex-wife's half when the house is worth $1.5M, you're essentially paying fair market value, which supports the basis calculation others have mentioned. One more thing - consider getting a formal appraisal done at the time of the buyout to document the fair market value. This creates a paper trail that could be helpful if the IRS ever questions your basis calculation down the road.

I went through something very similar about 3 years ago and want to share a few things I learned that might help you avoid some pitfalls I encountered. First, the cost basis calculation everyone's discussing is correct - your new basis will be roughly $1,147,500 (your original $497.5K plus the $650K buyout). But here's what caught me off guard: make sure you get a professional appraisal done RIGHT when the buyout happens, not just rely on estimated market values. I used a rough estimate and later had issues when I sold because the IRS wanted documentation of the actual fair market value at the time of transfer. Second, regarding the loan from your parents - definitely structure it as a formal loan with proper interest rates and documentation. I made the mistake of doing an informal arrangement and it created complications later. The IRS has specific "Applicable Federal Rates" that change monthly - make sure you use at least the minimum rate for the month you close the loan. Also, consider the timing of when you might sell. If you're planning to sell within a few years, you might want to think about whether it makes financial sense to buy her out at current market value versus just selling now and splitting the proceeds. With your numbers, if you sell in 2-3 years and the house appreciates much more, you could end up with a significant capital gains tax bill even with the $250K exclusion. One last thing - make sure your divorce attorney coordinates with a tax professional on the property transfer language. The exact wording in your decree can impact how the IRS treats the transaction.

I'm going through a very similar situation right now and this thread has been incredibly helpful! One thing I wanted to add that I've learned from my tax attorney - make sure you understand the difference between a "transfer incident to divorce" under IRC Section 1041 versus a regular property purchase when structuring this buyout. If the buyout is properly structured as part of your divorce settlement (meaning it's clearly documented in your divorce decree as division of marital property), your ex-wife won't owe any capital gains taxes on her portion when she transfers it to you. This is different from if you were just buying her out outside of divorce proceedings. Also, I'd strongly recommend getting everything finalized before your divorce is actually final. My attorney explained that Section 1041 protections are strongest when the transfer happens as part of the actual divorce process rather than afterward, even if it's clearly related to the divorce settlement. The cost basis calculation everyone has discussed is spot on, but the tax-free transfer aspect for your ex-wife is something worth mentioning to make sure she's comfortable with the arrangement. It might help with negotiations if she knows she won't face immediate tax consequences.