Divorcees shouldn’t wait too long after moving out to sell
Published: October 26, 2010
Time posted: 9:15 am
DEAR BENNY: My husband and I have a house entitled in joint tenancy, and I am filing a divorce.
I left our house about two months ago. In less than two years my spouse will retire and that will give him time to sell the house.
For his convenience, I am planning to have as part of the divorce decree that the house be sold in no later than two years. My spouse can afford to pay the mortgage if he wants to stay through that period of time. We have no kids from our marriage, but I have two grown-up, married kids on their own already.
Will that be acceptable to the mortgage lender? Will this be a disadvantage to me? I am sorry if this last question is one that I should direct to a divorce attorney. — C.S.
DEAR C.S.: By all means, you have retained legal counsel and the specific advice you need should come from him or her.
You have raised two questions:
(1) Will the mortgage lender have any problems with your proposal?
The short answer is no. So long as your ex-husband pays the mortgage, the lender will be happy.
(2) Will there be taxable consequences?
From your question, I must assume that you will not transfer the house to your husband pursuant to the divorce decree, but, although you will move out of the property, you will both agree to sell it within two years.
In order to take advantage of the up-to-$250,000 exclusion of gain, the IRS looks to the use and ownership test. You have to have owned and used (i.e., lived) in the house for two out of the five years before it is sold. However, according to the IRS, “If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it.”
Additionally, “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 use it as his or her main home.” (See IRS Publication 523, “Selling Your Home,” available from www.irs.gov.)
So, although you should confirm your situation with your divorce attorney, my reading of the law is that you and your ex would be able to sell the house and both of you would be eligible for the up-to-$250,000 exclusion of any profit you will make. Keep in mind, however, that this does not mean you can exclude all of the $250,000; it allows you only to exclude that much of your profit, subject to the cap of $250,000.
However, to be completely safe, I would insist that the house be sold no later than two years after you have left the house. Another IRS publication you should look at is 504, “Divorced or Separated Individuals.”
DEAR BENNY: I have been notified by our city that our family home must be licensed as a business and inspected at considerable cost to me. Never did I consider it a rental or a business.
I moved to my present house in 1992 to have larger quarters to accommodate my aging mother for eight years until her death. The smaller home (the one the city considers a rental) has been occupied for 18 years by my son who pays the upkeep, utilities, tax and insurance at no profit to me. Never has it been advertised as a rental. It’s just our family home. In your opinion do I qualify for an exemption? -- Shirley
DEAR SHIRLEY: I don’t know in which state your property is located, nor do I know the licensing requirements in your community. Accordingly, I can provide you only general advice.
From what you have told me, it does not appear that your home is a business. I would immediately contact a supervisor in the agency that sent you the notice and meet with him/her. Take pictures of your property, show them the utility and other bills that your son pays, and even get an affidavit from your son that he does not pay any rent – just upkeep and maintenance.
If the city still persists on pursuing this matter, I would appeal to a higher level. I would also talk with your local elected city representative and see what he/she can do. After all, our elected representatives are supposed to be responsive to those who elected them to office.
In the final analysis, you may have to pay the license fee and file a suit to enjoin the city from pursuing this further. But that’s expensive and requires legal assistance.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.