How does the IRS deal with profits after a separation when a house sales?

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My ex boyfriend and I purchased a home 8 years ago. We are both listed as borrowers on legal loan papers. We had worked hard on fixing it and increased its value considerably. The quality of our relationship, however, did not improve or increased and we separated. I moved out of the property a year and a half ago but remained legally responsible for the loan and he still lives in it. Although we are no longer together, we remain good friends. I am looking into purchasing a vehicle within the next four months and I am already sure that I won’t be able to qualify for an auto loan due to the financial responsibility I still share with my ex boyfriend. We have discussed refinancing the home and making him the sole responsible party for the loan and therefore, removing my name from the mortgage and its financial commitment.. Currently, he can not buy my part of the loan out and refinancing will be just to remove me from the papers without taking money from the equity to at least maintain similar monthly payments and hopefully get a better interest rate. We have agreed to sell the home later (still work to be done, not in optimal selling condition) and divide the profits once the sale goes through. If we refinance this loan to his name, how will the IRS deal with my share of the the profits? Since I will not listed as the borrower, I am afraid the IRS will read my gain as a gift and I will be taxed for it. Should I make the refinancing transaction with my ex through the courts to have a legal binding document to fall back to during tax time and for good practices sake? How should I go about this? HELP!

  1. Reply
    May 17, 2011 at 9:40 am

    Whether you are on the loan has no effect on the taxes on the gain. Removing yourself from the loan does eliminate your ability your ability to deduct the interest on the loan, but has no other tax implications. The question of whether the gain is a “gift” is determined only by who owns the house, in other words, who is on the deed, not the loan.

  2. Reply
    May 17, 2011 at 10:27 am

    IRS will not deal with the problem, you will
    you and your ex need to come to terms about how much you have invested in the property, as well as his investment
    if and when you sell the property, regardless of who is on the loan, you will need to arrive at a dollar amount of your joint investments
    you may have worked to improve the house but a good many of those improvements are not increasing the value of the house, they are considered living expenses
    if you increased the footage of the house, made major improvements that increased the value of the house these might be added to the basis but it sounds very much like you improved as you lived in it and these are not investment dollars
    and once you have arrived at the basis of the property, your joint investment into it, you can determine your gain/or loss when you sell it and distribute as you agree to, and possibly report on Sch D

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