Capital Gains Tax Liability For Non-resident Spouse

by Tom
(Reno, Nevada, USA)

In California; My wife and I entered a contract to buy a new house yet to be built. Approximately 7 months later the house was completed and we started to move in little by little.

We kept our previous primary residence which was going to be used as a rental property. The two houses were about 22 miles apart. Sometimes we both stayed in one house or the other, sometimes I stayed in the new house (closer to my job) and my spouse stayed in the first house (closer to her job).

About 6 months after the purchase of the new house we got into an argument over our son moving into the new house. He had been away in technical school for two years and was now looking to return to the general area where we lived. My wife didn't want our son moving in and said she'd never set foot in the new house again if I allowed him to move in.

At that point we went our separate ways. We separated and 11 months later she filed for divorce, this was put on hold for financial reasons. I stayed on in the house with my son for three more years. Then I decided I wanted to sell the house and move out of state.

The house was sold while we were separated with a divorce action pending in our local court. The sale netted a gain of approximately $180,000.00. My wifes name was on title the entire time we owned the house.

After the sale and before the escrow checks were cashed, we agreed she would sign over her interest in the proceeds from the sale of house two and in exchange I would sign interspousal transfer deeds giving her my interest in house one (which had been her primary residence since the original separation). The equity in the two houses was approximately equal.

Does she have a tax liability for the gain on the sale of house two?

Her tax preparer and at least one other 'tax expert' said she has a tax liability on the gain, and therefore she paid tax to the state of California and now expects me to be responsible for those taxes.

I paid a 20+ year tax expert to answer the question and I spoke to the IRS. Additionally I have prepared my own tax returns for over 20 years including times of self-employment and owning several rental properties. Based on my own knowledge and experience, lots of research on the subject, the opinion of the expert I paid and the IRS's response to the question.

Everything I've found and the responses from the paid tax expert and the IRS say she did NOT have any tax liability.

We are going to court next week to try to resolve this. Just curious about your view.


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