Divorce Before Selling House to Get Exemption
Q: My wife and I are divorcing. We are over age 55 and would like to take maximum advantage of the $125,000 profit exclusion when we sell the house we have lived in for the past 20 years. Should we make certain that escrow does not close before the final decree so that one of us does not lose his or her right to an exclusion? As unmarried people, would we each be entitled to an exclusion? Or is only one exclusion allowed per house, leaving the divorcing couple to choose who gets it? --M.R.D.
A: The rules are actually quite simple. The Internal Revenue Service allows one $125,000 profit exemption per person or per married couple. The exemption is given to people, not houses. So more than one unmarried person can use his or her exemption on profits resulting from the sale of a house they have shared.
What does this tell you? Simply this: You should have your final divorce decree in hand before you sell your house if you each want to use a $125,000 exemption. Otherwise, you will be forced to share a single exemption.
But, wait, there’s more. The IRS has been known to argue that a sale is essentially complete when all contingencies are met--not just when escrow closes. IRS agents can figure out when a divorcing couple is stalling the close of escrow to allow time for the final decree. So your safest bet is to wait until after your divorce is final to open escrow. Of course, in this slow real estate market, even if you put the house on the market before the divorce were final, you might have your decree well before you receive an offer from a buyer.
Double Withdrawal’s Effect on IRA in Future
Q: I turned age 70 1/2 this year. I have an individual retirement account from which I withdrew more than double the legally required minimum amount last year. Does this affect the amount that I may legally withdraw this year? --H.W . W.
A: No. The fact you have offered changes nothing. You do not have to take a minimum distribution until April 1 of the year after that in which you turn age 70 1/2. And the fact that you took double the minimum amount last year does nothing to change that.
The legally required minimum withdrawal that you must make by next April 15 will be based on your life expectancy and that of any beneficiaries of your IRA. The total number of years of life expectancy will be divided into the balance in the IRA as of December of the year before your turning age 70 1/2, in your case1989. So, by taking a large distribution last year, you lowered the account that will be used to calculate your minimum required withdrawal.
‘Quit Claim’ Can Get Mom’s Name Off Deed
Q: About 10 years ago, I helped my married daughter qualify for a home mortgage by allowing my name to be put on the deed of trust. My daughter has made all the tax and mortgage payments all these years. I am getting on in years and this is really her home. What can we do to put the house in her name only? --H.F.B.
A: Your question should have a simple answer, because all you were doing was lending your daughter your credit rating so she could qualify for a mortgage.
If you were merely co-signing a note to help your daughter--and you had no intention of acquiring an interest in her house--then all you would have to do is go to your county recorder’s office and file what is known as a “quit claim.” This document simply states that you are relinquishing any hold you might have on property in favor of another person. This filing should not trigger a reassessment for two reasons: The transfer is between two family members (assuming that the house is worth less than $1 million), and the house is your daughter’s principal residence.
Having said all this, let me now say that what you want to accomplish may not be as simple as it seems. The IRS could throw a crimp in things if it decides to argue that your quit claim is a transfer of ownership and, therefore, a gift.
The IRS could then require you to file a gift-tax return, and even though you might not be required to pay tax on the transfer, it would reduce the amount of your estate that would be exempt from estate taxes after your death.
To counter the IRS’ arguments, you would have to successfully argue that your co-signing the note was only an attempt to help your daughter meet minimum credit requirements and that you never intended to own any portion of her home.
Your argument is buttressed by the fact that your daughter made the mortgage payments and paid the taxes for the past 10 years.
Any document that you might have explaining your arrangement with your daughter, and how you had no intention of holding an interest in her home, would support your case.
