Magazine article The CPA Journal

Taxpayer Liable for Ex-Wife's Share of Gain on Sale of Resid

Magazine article The CPA Journal

Taxpayer Liable for Ex-Wife's Share of Gain on Sale of Resid

Article excerpt

In a regular opinion, the Tax Court recently ruled, in Murphy v. Commissioner, that a taxpayer is liable for his ex-wife's share of the gain on the sale of their jointly owned principal residence, where they filed a joint return for the year of sale.

IRS Sec. 1034 requires taxpayers to defer recognition of gain on the sale of their principal residence if they purchase a new principal residence within two years of the sale of the old residence. Gain is recognized only to the extent that the adjusted sales price of the old residence exceeds the cost of the new residence. In Rev. Rul. 74-250, 1974-1 C.B. 202, the IRS ruled that IRC Sec. 1034 applies separately to the gains realized by each spouse, where each is entitled to one-half of the sales proceeds from the old principal residence, and each purchased a new principal residence.

IRC Sec. 6013(d)(3) subjects each spouse to the full tax liability shown on a joint return. In Rev. Rul. 805, 1980-1 C.B. 284, the IRS ruled that a taxpayer who originally filed a joint return in the year of a residence sale must file an amended joint return if the IRC Sec. 1034 requirements for gain deferral were not met, even if his or her divorced spouse refuses to sign the amended return.

In 1988, the Murphys sold their jointly owned residence for $474,420 and realized a $185,629 gain. On their joint return, they deferred the gain by indicating their intent to purchase a new residence within the replacement period. They separated in 1989, and were divorced in 1991. In 1990, within the replacement period, William purchased a new residence for $199,704. In March, 1991, he reported additional income of $37,506 on his amended 1988 joint return, which was the unreinvested portion of his half of the adjusted sales price (1/2 of $474,420 = $237,210 - $199,704). Judy refused to sign the amended return. Also, she did not purchase a replacement residence within the two-year period and did not file an amended return to recognize her half of the $185,629 gain. …

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