Academic journal article Journal of Accountancy

Selling a House after Divorce

Academic journal article Journal of Accountancy

Selling a House after Divorce

Article excerpt

A husband and wife owned a principal residence with an adjusted basis of $150,000. They sold their home for an adjusted sales price of $250,000 and realized a $100,000 gain. They elected to defer the gain under Internal Revenue Code section 1034. Within a year, they separated and divorced. Within the two-year replacement period of section 1034, the husband used his share of the sales proceeds and purchased a new home for $120,000. The ex-wife did not buy another home. What was the husband's recognized gain?

In William H. Murphy v. Commissioner(lO3 TC, 111, 1994), the Tax Court said that the husband would be taxed on only $5,000. The court, citing revenue ruling 74-250 (1974-1 C.B. 202), said the nonrecognition provisions of section 1034 should be applied separately to each divorced spouse. Using this approach, the husband was treated as having sold a $125,000 home with a basis of $75,000 for a realized gain of only $50,000. Since he reinvested $120,000 of his share of the sales proceeds, the husband was taxed on only the $5,000 that he did not reinvest.

In Murphy, the IRS unsuccessfully had argued that the husband and wife should be treated as one taxpayer. …

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