Legal Question in Tax Law in New Jersey

Avoiding capital gains during separation property transfer

My wife and I are seperating, and at the selling price of 700,000 we have an appreciation of $400,000 in our house. If we sell now we would be able to exempt the full amount from capital gains (limit of $250,000 for each). If I take out a line-of-credit, and buy out her interest, remove her name from title, and sell later, I'll will be stuck with paying her capital gains tax on over $250,000 profit since the cost basis of the house will not change. I suppose the same problem if I refinance. I believe only if the transaction is done as a purchase where both of us sell the property to me that both of us can avail of the total $400,000 capital gains tax free, and increase the cost basis of the house to 700,000 to avoid capital gains when sold in the future. However, a purchase will have additional expenses such as estate transfer fees, and may cost the property to be reassesed. Reassessment may occur even with any deed transfer, I understand.

Is my understanding correct? What is the best way to acheive my goal? Ideally I would not even like to refinance but simply avail of a line-of-credit since we have an excellent interest rate. The second choice would be to refinance if my capital gains goal can be acheived.


Asked on 9/27/05, 11:19 pm

1 Answer from Attorneys
Walter LeVine Walter D. LeVine, Esq.

Re: Avoiding capital gains during separation property transfer

You are partially correct, so let me explain using some assumed numbers. Original cost and improvements over the years, gives you a cost of $300M. House can sell for $700M. If you and your wife sell now, and file a joint return, you can exclude up to $500M of any gain. This excludible amount is not actually allocated $250M each, but is an amount available to a married couple, regardless of whose name the house is in (jointly or one only). Lets say you buy her out, as an alternative. What you pay her becomes an additional cost and is added to your basis. Lets assume you pay her $200M. Your new cost basis is $500M (original cost of $300M plus buying out her interest for $200M). You sell for $700M. You have a $200M profit, totally non-taxable since you have an individual exclusion of up to $250M if the property is your primary residence and you have owned it for more than 2 years.

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Answered on 9/28/05, 12:10 pm


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