Selling my first home, post-divorce

[James Bradley]

Hi all!

I am under contract on the sale of my first home, I have owned the house for 10 years in Oakland County, MI. 

I HAVE lived in the home for 2 of the last 5 years and the reason for sale is my recent divorce. Here are some details;

Purchased: 131k in 2014 

Occupied the home until a little over 1 year ago, my ex currently lives there. Refinanced in 2017 roughly to drop PMI, lower interest rate and add my then wife to the mortgage.

Selling for 287k in August of 2024

I know that I won't have to pay capital gains tax on the profits- my question is the profit from the sale still treated like income and taxed accordingly? Or do I have literally NO tax obligation from the sale?

Thank you in advance!

James

[Ben Trageser]

Was this property ever rented or just always used for personal use? Based on only the facts and circumstances listed above and if it meets the 2 out of 5 year test, it will be considered under the $250,000 income threshold and non-taxable. The rest of the funds received will be considered a return on your cost basis and non-taxable as well.

[Zachary Jensen]

Quote from @James Bradley:

Hi all!

I am under contract on the sale of my first home, I have owned the house for 10 years in Oakland County, MI. 

I HAVE lived in the home for 2 of the last 5 years and the reason for sale is my recent divorce. Here are some details;

Purchased: 131k in 2014 

Occupied the home until a little over 1 year ago, my ex currently lives there. Refinanced in 2017 roughly to drop PMI, lower interest rate and add my then wife to the mortgage.

Selling for 287k in August of 2024

I know that I won't have to pay capital gains tax on the profits- my question is the profit from the sale still treated like income and taxed accordingly? Or do I have literally NO tax obligation from the sale?

Thank you in advance!

James

 Hey James, 

Does your ex pass the ownership and use test(2 of the last 5 years owned and lived in the property)? She might also qualify for the 121 exclusion 

[Joshua Thompson]

You most likely will not have a tax obligation but without knowing your full tax situation we won't be able to say that with 100% certainty. In an ideal world, you'll report the sale of the home on your personal tax return and qualify for the exclusion. At the end of the day, if it all works out, there will be no additional income shown on your tax return, you'll only be reporting the transaction for informational purposes and to prevent a notice.

[James Bradley]

Quote from @Ben Trageser:

Was this property ever rented or just always used for personal use? Based on only the facts and circumstances listed above and if it meets the 2 out of 5 year test, it will be considered under the $250,000 income threshold and non-taxable. The rest of the funds received will be considered a return on your cost basis and non-taxable as well.

Thanks for the response Ben 

The house was never used as a rental, it was owner occupied by myself for the duration of the mortgage.

[James Bradley]

Quote from @Zachary Jensen:

Quote from @James Bradley:

Hi all!

I am under contract on the sale of my first home, I have owned the house for 10 years in Oakland County, MI. 

I HAVE lived in the home for 2 of the last 5 years and the reason for sale is my recent divorce. Here are some details;

Purchased: 131k in 2014 

Occupied the home until a little over 1 year ago, my ex currently lives there. Refinanced in 2017 roughly to drop PMI, lower interest rate and add my then wife to the mortgage.

Selling for 287k in August of 2024

I know that I won't have to pay capital gains tax on the profits- my question is the profit from the sale still treated like income and taxed accordingly? Or do I have literally NO tax obligation from the sale?

Thank you in advance!

James

 Hey James, 

Does your ex pass the ownership and use test(2 of the last 5 years owned and lived in the property)? She might also qualify for the 121 exclusion 

Thanks for the reply Zachary 

Both my ex and myself have occupied the home for 2 of the last 5 years. She was added onto the mortgage 6-7 years ago when we refinanced.

[James Bradley]

Quote from @Joshua Thompson:

You most likely will not have a tax obligation but without knowing your full tax situation we won't be able to say that with 100% certainty. In an ideal world, you'll report the sale of the home on your personal tax return and qualify for the exclusion. At the end of the day, if it all works out, there will be no additional income shown on your tax return, you'll only be reporting the transaction for informational purposes and to prevent a notice.

Hey Joshua

Thanks for the reply! I have a single, average income if that matters at all. 

Would the best bet be for me to just park a chunk of that money in a high yield savings account until tax time? I am planning on purchasing my next home this fall. 

[Joshua Thompson]

Quote from @James Bradley:

Quote from @Joshua Thompson:

You most likely will not have a tax obligation but without knowing your full tax situation we won't be able to say that with 100% certainty. In an ideal world, you'll report the sale of the home on your personal tax return and qualify for the exclusion. At the end of the day, if it all works out, there will be no additional income shown on your tax return, you'll only be reporting the transaction for informational purposes and to prevent a notice.

Hey Joshua

Thanks for the reply! I have a single, average income if that matters at all. 

Would the best bet be for me to just park a chunk of that money in a high yield savings account until tax time? I am planning on purchasing my next home this fall. 

 Hey James, I wouldn't feel comfortable giving a guaranteed 100% answer to someone on the forums without doing my due diligence on their situation. I would recommend jumping a 30 minutes call with an accountant and invite your financial advisor to discuss this transaction as well as your personal goals and plans for the funds.

[Zachary Jensen]

Quote from @James Bradley:

Quote from @Zachary Jensen:

Quote from @James Bradley:

Hi all!

I am under contract on the sale of my first home, I have owned the house for 10 years in Oakland County, MI. 

I HAVE lived in the home for 2 of the last 5 years and the reason for sale is my recent divorce. Here are some details;

Purchased: 131k in 2014 

Occupied the home until a little over 1 year ago, my ex currently lives there. Refinanced in 2017 roughly to drop PMI, lower interest rate and add my then wife to the mortgage.

Selling for 287k in August of 2024

I know that I won't have to pay capital gains tax on the profits- my question is the profit from the sale still treated like income and taxed accordingly? Or do I have literally NO tax obligation from the sale?

Thank you in advance!

James

 Hey James, 

Does your ex pass the ownership and use test(2 of the last 5 years owned and lived in the property)? She might also qualify for the 121 exclusion 

Thanks for the reply Zachary 

Both my ex and myself have occupied the home for 2 of the last 5 years. She was added onto the mortgage 6-7 years ago when we refinanced.

 Happy to help !

[Ben Trageser]

Quote from @James Bradley:

Quote from @Ben Trageser:

Was this property ever rented or just always used for personal use? Based on only the facts and circumstances listed above and if it meets the 2 out of 5 year test, it will be considered under the $250,000 income threshold and non-taxable. The rest of the funds received will be considered a return on your cost basis and non-taxable as well.

Thanks for the response Ben 

The house was never used as a rental, it was owner occupied by myself for the duration of the mortgage.

 Happy to help!

[Tanner Bellamy]

Quote from @James Bradley:

Hi all!

I am under contract on the sale of my first home, I have owned the house for 10 years in Oakland County, MI. 

I HAVE lived in the home for 2 of the last 5 years and the reason for sale is my recent divorce. Here are some details;

Purchased: 131k in 2014 

Occupied the home until a little over 1 year ago, my ex currently lives there. Refinanced in 2017 roughly to drop PMI, lower interest rate and add my then wife to the mortgage.

Selling for 287k in August of 2024

I know that I won't have to pay capital gains tax on the profits- my question is the profit from the sale still treated like income and taxed accordingly? Or do I have literally NO tax obligation from the sale?

Thank you in advance!

James

 Sorry about the divorce. Based off your brief story, it seems that you will be off the hook in regards to paying tax on the sale although I don't feel comfortable guaranteeing that without knowing all of your facts and circumstances. 

You may be confusing 'profit' with 'cash from the sale'. If there is a net profit AFTER the Section 120 exclusion then you will pay tax. You should be receiving cash whether you show a profit or not but receiving cash doesn't mean you have a profit.