Buying ex-spouse's stake raises cost basis of house


Q: In the case of a divorce when you're over age 55, if I buy out my ex-husband's share of my house, do I have to pay gift or other taxes on the amount? If not, how do I account for this money?

M. Hart, Pasadena

A: You won't owe any gift or other taxes on the money used to buy out your ex-husband's interest in your home. Instead, the money would be treated as an additional purchase price or, put another way, would increase your "cost basis" in your home.

For example, if you originally paid $50,000 for your house, and years later you paid your ex-husband another $25,000 for his share, your total cost basis for the house would be $75,000. Because you are at least 55 years old, if you would sell your house for $150,000, the gain that you realize would be tax-free, up to $125,000.

Given your situation, you could buy out your ex-husband and keep your home or sell it for up to a $125,000 gain. Either scenario would be tax-free to you.

Q: I purchased a home during the past year. Can I deduct from my income tax the points paid by the seller at closing to my mortgage lender at settlement?

Arlene Schwartzman,


A: Yes, under a recent IRS ruling issued within the last year, homebuyers can now deduct from their gross income for purposes of computing their income tax all points paid by the seller at their home closing.

This change, which is retroactive to the 1991 return, will affect both federal and state tax returns.

Under the old rules, homeowners could deduct only those points that they paid themselves for their principal residence. Now, according to the new ruling, buyers can deduct points paid on their behalf by sellers.

A point is a fee charged by the mortgage broker or lender. One point equals 1 percent of the loan amount. For example, if you paid two points on a $100,000 loan, the points would equal $2,000.

The terms "loan origination fee," "loan discount," or "discount points" may be used interchangeably with "points" on your settlement sheet.

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