Legal Question in Tax Law in California

Re: divorce and spouse wants to buy the home..

First of all... most people qualify for Internal Revenue Code Section 121 which allows a 250,000 dollar capital gains exemption (500,000 for married couples) on the sale of the primary or secondary residence. There are some limitations such as: you may not have used the exemption in the past five years (there are some modifications to this as well in certain circumstances); you must have used it as your primary or secondary residence for 3 of the last 5 years; and the house must not fall under certain previous exemptions (such as you tax a tax deferral transfer on the home back before section 121 was put into effect); also any depreciation will be recaptured (meaning that if you rented the home out and depreciated it, you must pay capital gains on the depreciated part). This is only a very general explanation of section 121, anyone should seek the help of a qualified tax professional before applying it to them.

There are some more issues here, such as most likely you only sold half of the home to your spouse (assuming it was community property). Meaning that most likely, the house would have to have appreciated past 500,000 dollars over basis before you would have tax due. I would also mention that since you are making this transfer per a divorce, there are some other issues at play here. There is a chance ou might fall under section 121(d)3b, which might allow you to use the exemption even if normally you would be unable to.

Basically you need to see either an attorney that handles this area of law or an accountant that can assist you (the accountant will be less expensive). This is a complicated issue (as you probably can tell) and we can not give you a conclusive answer without seeing your individual situation.