Divorce and Taxes: How to Defer Profits From Sale of Your Home

<i> Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128</i>

QUESTION: My soon-to-be-ex-wife and I are getting a divorce and selling our home. We paid around $82,500 for it and should receive about $175,000 from its sale. My questions concern how much tax we will owe on the sale, and if there is any way we can avoid paying tax.

ANSWER: Presuming you and your ex-wife are dividing the sale of your former principal residence equally and neither of you is 55 or older, you can each qualify for 100% tax deferral profit if you each buy a qualifying replacement principal residence. However, if only you or only your wife buys a replacement home, then just that one spouse gets to defer tax on their share of the profit and the other spouse must pay tax on their profit share.

When using the “roll-over residence replacement rule” of Internal Revenue Code 1034, all that really matters is your net (adjusted) sales price.

As an illustration, let’s presume your home sells for $175,000 after paying sales costs, such as the realty sales commission. Dividing $175,000 by two means that to defer tax on your half of the sales profit, you must buy a replacement principal residence costing at least $87,500 within 24 months before or after the sale.


Even if your ex-spouse doesn’t buy a replacement home but you do, you can qualify for tax deferral while your ex-wife pays tax on her profit share. Please consult your tax adviser for full details.

Telling the Truth About Time-Shares

Q: Several months ago, you said the big problem with time-shares was that there is virtually no resale market. As the owner of a rather desirable Hawaiian time-share, I fully agree. Yes, there are a few auctioneers, but they usually sell time-shares at very distressed prices. Since you never seem to hold back what you are thinking, what do you really think about time-shares?

A: Every time I answer a question about time-shares I receive incredible pressure from those in the time-share industry who try to “re-educate” me. I have had to ask some of them not to contact me further because they have worn out their welcome.

As I’ve said before, the time-share developers earn huge profits. They are selling future vacations, which is fine. But nobody should invest money they ever want to see again. The reason is that it is almost impossible to get out of a time-share purchase for the amount paid. Even the time-share promoters agree.

I do not like time-shares and do not recommend them. Time-shares are not real estate investments. Rather, they are purchases of future vacations. The very limited resale market that exists sells these time-shares at distress prices. Buying a time-share in a desirable complex in the resale market from a distressed seller can be a great place to buy.

Bankruptcy Filing No Foreclosure Protection

Q: Due to unemployment and illness, I have been unable to make my mortgage payments. Last February, the mortgage company started foreclosure. In March I filed bankruptcy to stop the foreclosure. But in May the bankruptcy judge said the mortgage company could proceed to foreclose. Last month, they sold my house at auction and I am now being evicted by the buyer. I thought filing bankruptcy stopped them from foreclosing. How can this happen to me?


A: Filing bankruptcy only delays real estate foreclosure. If you don’t work out a satisfactory mortgage payment plan, the mortgage lender can get the automatic stay against foreclosure lifted. That is apparently what happened.

Since the foreclosure sale was approved by the bankruptcy court when the automatic stay was removed, unless the sale was incorrectly handled, it appears you have no further rights in your home. Please consult a real estate attorney for further details.

Promising Cure for ‘Buyer’s Remorse’

Q: My husband and I signed a contract to buy a home. The realty agent arranged what, I admit, is a terrific fixed-rate mortgage. But I’m not sure about my job, as I’ve heard the hospital where I work as a nurse might be cutting back. Fortunately, my husband owns his company and business is booming. But without my paycheck, I’m not sure we can afford this house. How can we get out of our purchase contract, as I am scared we won’t be able to afford the payments?


A: It sounds like you have a very serious case of “buyer’s remorse.” The best remedy for this non-fatal disease is to consider the pros and cons of that house you agreed to buy.

Please list all the advantages of buying, such as a home meeting the needs of your family, in a desirable part of town, for a reasonable purchase price and with favorable financing. I’m certain you can list other advantages.

Now try to think of any disadvantages. Perhaps a large mortgage payment, but with a large itemized interest deduction on your tax returns. Maybe you won’t be able to make the mortgage payment if you lose your job. But I hear registered nurses have no trouble finding jobs so, at the worst, you might be out of work an hour or two.

If it is any comfort, most home buyers suffer the same buyer’s remorse you are encountering. I remember contracting this dread disease the first night I lay awake in my new home worrying about how I would ever make the mortgage payments. Fortunately, I made the next payment and all 132 payments since then.


Since then, my home has more than quadrupled in market value, has been a very comfortable place to enjoy living and has provided some outstanding income tax advantages, too. I’m certain your new home will be an equally profitable investment once you get over your non-serious case of buyer’s remorse.

Double Joint Tenancy in 2-Family Duplex

Q: You are not going to believe this, but my wife and I want to buy a two-family duplex house with my in-laws. They are wonderful people who treat me like a son. My wife and I have two children who get along great with their grandparents. We found a huge two-family duplex house where my in-laws would live in the two-bedroom unit and our family will live in the four-bedroom unit.

They will be making the down payment, and we have agreed to split the monthly payment on a one-third, two-thirds basis. The problem is how to hold title. We all want to own the property as joint tenants with right of survivorship. But my wife thinks we should own half and her parents should own half, as joint tenants. Can this be done?


A: Of course. Although you didn’t indicate the ownership shares, I presume each couple will own one-half the property. In other words, each couple can own their half as joint tenants with right of survivorship. When one spouse dies, the surviving spouse then owns that half as surviving joint tenant. In other words, you will have a double joint tenancy in the two-family duplex. A real estate attorney can prepare the deed.

Risk of Buying a Home ‘Subject to’ Mortgage

Q: Almost six months ago, we bought our first home. I admit we were rather uneducated and the sellers took advantage of us. However, the price was a good deal so we really can’t complain. But the problem is the mortgage. The seller said we could “take over” the payments on their old mortgage. Not knowing any better, we did so.

A few months ago we received a nasty letter from the lender stating that if we did not agree to raise the loan’s interest rate from 8.75% to 10%, the lender would call the loan. When I contacted the sellers, they said the lender told them we could take over the loan. The lender denies any such statement. If the interest rate is increased, our monthly payment will go up substantially. What should we do?


A: Rather than assuming the existing mortgage, it appears you bought the home “subject to” the old loan. If it contains a due-on-sale clause, the lender is entitled to call the loan if the property is transferred to new ownership. However, if there is no due-on-sale clause or the lender told the seller it could be assumed by a buyer, then the lender cannot call the loan or increase your interest rate.

Your first step is to get a copy of the promissory note and mortgage. Then read it to see if there is a due-on-sale clause. If not, the lender cannot call the mortgage. If there is a due-on-sale clause, consult a real estate attorney about negotiating with the lender and the seller. Incidentally, the seller may still have liability on that mortgage if you default and the lender suffers a foreclosure loss.

Amount of Earnest Money Is Disputed

Q: As a real estate agent, I find I must read your articles otherwise my buyers and sellers tell me what you had to say and I appear to be ignorant. But I must take issue with you about your suggestion that home buyers make as small an earnest money deposit as the seller is willing to accept. That’s baloney. As a longtime realty agent, I know, as I’m certain you do, too, that the larger the deposit, the greater the probability the buyer will complete the home purchase as agreed. Don’t you think it’s time you change your thinking and tell buyers to make earnest money deposits of at least 10% of the sales price?


A: Sorry, I can’t agree. Yes, when I am a property seller I want a substantial earnest money deposit. If I feel the buyer’s deposit is inadequate, I can make a larger deposit requirement part of my counteroffer.

However, when I am a buyer I want to make as small a deposit as possible, just in case the seller can’t or won’t deliver the property on the terms agreed. I want to tie up as little cash as possible until the sale is ready to close. From your viewpoint as a realty agent, I fully understand why you want buyers to make large earnest money deposits. However, we will have to agree to disagree on this issue.

Net Listings Can Be Troublesome, Illegal

Q: I want to net a specific amount for the sale of my land. However, I cannot find a decent real estate agent who will take my listing. I know my land is not easy to sell and want to give the agent maximum incentive. Why can’t I find any agent who will take my net listing?


A: Most real estate agents are aware of the pitfalls of net listings, which are illegal in some states. As a property seller, you should be grateful the agents you contacted wouldn’t accept your net listing.

Problems can develop with net listings in several ways. If the agent obtains a low offer below your net price, the agent might be tempted to lose that offer and never deliver it to you because the agent would receive no sales commission. However, if the agent obtains a purchase offer substantially above your net price, you would feel the agent failed to inform you of the true value of your property and you would probably insist the agent adjust the sales commission.