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February 28, 2011

In a Divorce, Is It Best to Sell the House?

Given that January was the month in which the most divorces were (according to the averages) filed, the question on a lot of former couples' minds right now is probably, "Who gets the house -- or do we sell it?"

The issue has only gotten thornier since the recession, with both house values and earning power down. As explained in the article, "Divorce Wannabees in the Age of Recession: How Trapped Couples Are Coping," by Roslyn Zinner of the Huffington Post, couples who are underwater on their mortgage or have significant other debts simply can't, in some cases, afford to split up the household -- leading to situations where, for example, one spouse "moves" to the basement.

Hmm, could there be a silver lining in Zinner's description of how couples don't fight over the house so much anymore, since neither wants to deal with the costs of homeownership? Okay, never mind.

Interestingly, one solution she describes -- in which the couple agrees to continue jointly owning the home, while one moves to an apartment, and they sell when the economy is better -- was exactly that arrived at (after much negotiation) by a Los Angeles couple described in the Financial Adviser blog titled "Breaking Up Is Hard to Do," by Zack Anchors, in the Wall Street Journal.

So, if and when the market turns around (whenever that might be, which no one can safely predict), we may see a flood of homes being sold by long-divorced couples!


February 17, 2011

No, You Can't Deduct Losses on the Sale of a Home

This myth has been busted a zillion times, and yet it persists -- maybe because taxpayers believe that the tax code should make logical sense. If you have to pay capital gains tax when your profits on the sale of a house exceed the $250,000 (or $500,000 per married couple filing jointly) exclusion, then why shouldn't you be able to apply your losses on a  home sale against any other capital gains?

image_3_Thumbnail.jpgOops, looks like I boxed myself into a corner where I now have to explain this. The short of it seems to be that a house is considered "personal property" by the IRS, and personal property gets special treatment -- and not the good kind of special. You pay taxes on the gains from the sale of personal property, but get no benefits from the losses. (Perhaps they're trying to avoid having people take massive deductions for every item sold cheap at a garage sale.)

Worse news yet, if you had to sell your house for so little that your lender needed to forgive some of your debt (as with a short sale or a deed in lieu of foreclosure), the IRS may try to collect tax on the amount of the forgiven debt. The reasoning is that it's almost like your lender handed you a check, which is income -- never mind that you then handed it back to the lender. But don't panic: You may qualify for relief under the Mortgage Forgiveness Act, described by the IRS at www.irs.gov/newsroom/article/0,,id=205004,00.html