How to Deal with a House in a Divorce Settlement?

Dear Sabby,

My soon-to-be ex-husband doesn’t have the cash to make a lump-sum alimony payment to me, and we don’t want to drag out this process after the divorce, or to see each other again. We each have about $400,000 in equity in the house we shared, so my divorce lawyer and I are thinking of letting him have the house now, and then my boyfriend can buy out my ex’s equity via a refinance on the house a few months later so that my ex would have the money to pay me the lump sum, and then I would move back in.

What are the tax consequences for me in the two transactions – 1) I let my ex have the house in the divorce now, and 2) When my boyfriend buys out the equity, and how would that affect the basis of the house (capital gain calculation) if I end up marrying the boyfriend? Or if I don’t end up being with him?

– Taxed by The Love Triangle

A Simple Solution: No Refinancing Necessary

Dear Triangle,

When I first read your letter, I was overjoyed at the amount of consulting fees I could charge you for the complicated financial twists and turns you devise for yourself, the ex, and the boyfriend in this saga. But no, my happiness should not be built on other people’s financial loss (or the ex-spouse’s purse). Integrity before income.

Now, let’s break it down. Ex doesn’t have cash to pay you. You want the house. And in case you and your current boyfriend don’t work out, you’d better not be house-bound to him financially and complicate your romantic situation once again.

The legal standpoint is this – spousal transfer is a non-taxable event when it is incidental to a divorce and even when the transfer is one year after the cessation of the marriage. Your basis in the house, for future capital gain calculation purpose, will be the cost basis when you and your ex bought the property.

So a simple solution is at hand, but check with your lawyer first to see if he/she is OK to have his/her fees reduced by the said simple solution.

You stay in the house, negotiate with the ex that his share of equity in the house is part of, or all of, the lump-sum he owes you. So you alone own the house, and your ex parts with you but none of the cash ( therefore expediting the negotiation of the settlement). If you want to have the current boyfriend involved with the house irrespective of your romantic status, you can write him a simple IOU for the money he wants to lend you to substitute out your ex’s portion of the mortgage.

Good luck with the romantic and financial settlement,

Sabby