Legal Question in Tax Law in California

Re: Deferred Home Sale in Divorce

The rules for capital gain exemption based on primary residence are very strict ... you must have owned AND LIVED IN THE PROPERTY for 2 of the last 5 years. You do not qualify, but your ex does.

The next question for you would be whether your interest in the property would qualify as investment property, and therefore qualify for an IRC Sec.1031 exchange. If so, you could take the proceeds of the sale and invest in another property, delaying the tax.

There are other ways to avoid the capital gain, but whether or not you would want to use them depends upon your overall situation.

Re: Deferred Home Sale in Divorce

There is a look back period of five years from the time of the sale. If you owned and used the home as your primary residence for at least two years within those five years, then you are eligible to exclude up to $250,000 of capital gain (twice this amount if married).

Ownership and use periods can be at different times in those five years. It seems that you have met the ownership requirement, but not the use requirement since your ex-wife has been living there since your divorce in 1996.

You may want to postpone the sale of the home and talk to an attorney about the situation. There may be arrangements you can make with your ex that could still qualify you for the use requirement, and thus the capital gain exclusion.

Re: Deferred Home Sale in Divorce

Use of home after divorce. You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home.

SEE: http://www.irs.gov/publications/p523/ar02.html#d0e1959

SEE 26 CFR 1.121-4(b) at page 39 of:

http://www.irs.gov/pub/irs-regs/td9030.pdf