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Know the Facts Before Agreeing to Buy Out Your Ex-Spouse

Friday, January 30, 2009 posted by Tommi Crow


A lack of buyer’s in the housing market is making things tougher on divorcing couples.   Sadly, many people are stuck, unable to find a buyer for their co-owned property.    While one solution may be for one spouse to buy out the other, please take the time to understand the consequences and future liability.   If not, you may end up paying the ex much more than you planned.

 Things to Know Before You Buy Property From Your Spouse or Ex

Internal Revenue Code 1041:  Section 1041 states that gains or losses are NOT recognized by the IRS on transfers between spouses during marriage, or on transfer’s between ex’s, if the transfer was a part of the divorce settlement.  

For example, if you agree to pay the ‘ex’, or to ‘ex’ to be, $200,000 for their equity in your co-owned property, the cost basis of the property will not increase.  If you sell in the future, you will pay income taxes based upon the original cost basis of the property, excluding your $200,000 payment.

State Taxes:  Many states do not recognize gains or losses on property transfer’s to spouses or ex’s.  Check on the tax consequences about a future sale before making an offer.

Real Estate Fee’s and Transaction Costs: Take into consideration what the costs of the sale would be.  Calculate what each of you would expect to receive (net) today, after paying real estate commissions, repairs and closing costs in order to determine a fair purchase price.

Summary:  When determining the value of co-owned, marital property, consider that the spouse who is buying will effectively pay the selling costs, along with the federal and state income taxes, on the other’s share, so account for it.   And remember, it is always advisable to seek the council of a tax professional when discussing issues dealing with real property.

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