Bought our home in 2006, had third child so we outgrew home. We had a first and 2nd loan. We did a modification of our loan in 2009. Then our 2nd loan was forgiven. We rented out the property in Jan 2012. Rented from 2012 until 12/31/14. I sold the property myself (not a realtor) and got a retainer fee of $24K. Property sold Jan 6, 2015. My tax person is telling me I owe taxes on the $114K that was forgiven, plus taxes on selling the house (profit made). I thought there was some clause with IRS or something that says if you are forced to sell your property due to divorce taxes are waived or something like that? What can I do here? How can I avoid paying all these taxes? I also received a $24K partial settlement (for RSU, bonuses). Joint E*trade act, Taxes taken our of Stock when disbursed, why do I have to pay more taxes? I am being taxed twice. Ex Bonus, he was taxed already, i get the money and I have to be taxed again? Please help...I now told i owe $40K in taxes due to this divorce and its not over yet. Who can I talk to Tax Attorney?
Generally if a loan is forgiven the amount forgiven is discharge of indebtedness income. There is an exception if the debt was forgiven as result of bankruptcy or you were insolvent at the time of the forgiveness. There is also an exception for qualified residence. The following link may help:
I recommend that you discuss this with a tax professional who can determine whether any of the exceptions apply to your forgiven loan.
With regard to the profits from the sale of the residence there are provisions for tax free sale of principal residence. Again discuss with a tax professional to see if you meet the requirements. The fact that you turned it into a rental property may deny the benefits of these provisions.
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You should consult with a tax attorney in your area for clarification and explanation of the issues in your post. Additional information is needed to determine if taxes are due in each circumstance. Typically, a portion of the profit made on the sale of a primary residence is tax exempt; however, you converted the primary residence into rental property and the exemption goes away. With respect to the forgiven second mortgage and partial settlement, a tax attorney would need additional information from you to provide you with guidance. In most cases, a certified public accountant can answer these questions for you, as well. Best of luck to you!
You should consult a tax professional if you believe you are getting incorrect information on that end. As it relates to transfers of property as a result of a divorce (for example, you keep the family home only in your name, or your spouse pays you $100K to equalize his keeping the family home), such transfers are not taxable events. But, if you sell the house, even if ordered to do so by the judge in your divorce matter, you are subject to capital gains taxes. If you received money as your share of the community assets (RSU, bonus), depending on how your divorce decree is worded, these could be a non-taxable or a taxable event. I am careful to have this conversation with my clients BEFORE we draft, to make sure they understand the tax impact - I often refer my clients to tax professionals to make sure they are getting accurate and current information. If the wording says that the funds were for an "equalization" of the marital estate, this would, likely, be a non-taxable event. If, however, you are receiving it, pre-tax, and that tax liability was given to you, you would pay that tax. Also, if you received stocks, or retirement funds, and you liquidate (sale or pull the funds out early), even thought it was part of a divorce settlement, once you pull the funds out, this creates a taxable event.
As for the debt forgiveness, this is not my area of practice. You should consult a tax expert to give you the most updated information. There was a lot of back and forth in the news about this (that it would be forgiven, but the amount forgiven would be taxed as income, then it wouldn't, then only under certain circumstances, etc).
I hope this information is helpful to you. You really should have a family law lawyer review your judgment so that you have a clear understanding of what was ordered and the practical impact such orders have on you, as well as what, if any, options you have for modifying the orders to address your concerns.
Since the information provided in your question is very limited and I have not had an opportunity to review all relevant facts, information, and documents, you should not rely on any specific responses to your questions. The information offered here is general in nature given that the slightest bit of additional information could change a specific answer (i.e. we separated 1 year ago and he has been paying all my expenses. Q: Do I owe him that money back? A: Yes. But what if he used money from a community asset, like a retirement account, to pay it back. A: maybe some or maybe none). In short, consult an attorney to review all relevant information so s/he can properly and accurately advise you. This free service IS NOT a substitute for legal advice and should not be considered legal advice at all.
There are several issues going on here that you need to break down:
1. There is no free pass from income taxes for sale of home to a 3rd party due to divorce. You may be getting confused with rules dealing with transfers of martial property between 2 spouses which has the "no tax" treatment you are thinking about.....but that is not relevant in your fact pattern.
2. IRC Sec. 121 deals with a special rule for an exclusion of gain from sale of a "principal residence" up to a maximum of $250K...however, the tough part is determining whether the home will count as your principal residence. You have to meet 2 out of 5 years to qualify. Further, to the extent it was rented there is a scale-back rule for what is known as "nonqualified use". See enclosed link https://www.law.cornell.edu/uscode/text/26/121.
3. The reference to RSU and bonus presumably is the details of the separation agreement and that is a contract that would spell out who as between you and spouse is responsible for the income taxes imposed on such taxable compensation. To the extent spouse allocated you taxable income then likely that the tax burden would be shifted to you......but if taxes already taken out then a calculation would be made on an after-tax basis.....these are all details that would be spelled out in your separation agreement.
My answer is not intended to be giving legal advice and this topic can be a complex area where the advice of a licensed attorney in your State should be obtained. Please click "helpful" or "best answer" if my answer added any value or add a "comment" if you have more info for me to help you get a better answer.
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