I have a ? about second mortages?

Question

A friend moved into his new wifes house she obtained through a divorce. (the house is now in her name only) Low and behold he found out after "I do" that she had bad credit and a mountain of credit dept, so he took out a loan on the house. They now plan to sell the house and he's going to pay the loan. If they get divorced, does HE have to pay capital gains taxes?

Answer 1

If his name is on the deed, yes. He could not have taken out a loan on the house unless he was added to the deed so he must be on the deed. His cost basis in the home would be the pass-through basis as it was a gift from his spouse. Therefore his basis is 1/2 of the original basis in the home.

If the home is subsequently sold at a gain he would be liable for any capital gains tax on his share if the sale did not qualify for the exclusion on sale of a principal residence. In this instance, each taxpayer's claim for the exemption would stand on its own merit independent of the other's since a divorce was involved.

In response to the poster who referred to the quitclaim deed, SHE is the one who would have to quitclaim to him, not the other way around. She'd have to do that in order for HIM to pledge the property as security for a loan. And if her credit was so horrible that they couldn't qualify for a joint loan she'd have to quitclaim the entire property to him to get the loan through. That would put him on the hotseat for the ENTIRE capital gains tax if the exclusion didn't apply. (And she'd be left out in the cold for any equity in many states.)

This is the type of situation that requires the guidance of separate attorneys for BOTH parties to ensure that their rights are adequately protected. The "Golden Rule" of finance is this: Never marry anyone with credit or tax issues!

Answer 2

Talk to a tax person. Your description of the issue is not clear enough to make an informed answer.
That said, if he acquired the home a a community asset , where the wife "added" him on to title, then probably not, and then also there is the 2 year rule where most equity build up is not taxable , Again depending on how much gain there was. If this is all recent, it is likely the property is worth MUCH less than a year or so ago, and thus capital gains should be minimal if at all.

Again your unique situation should be discussed with a tax expert.

~ four2x4

Answer 3

There are some missing facts here. He moved in to the house, but you don't say that he took title to it with her. If he is not an owner, I don't see why he would have any tax liability for the sale if he is not the owner. That is not to say that some portion of the tax liability would not be allocated to him as part of the divorce, but I don't see how the IRS, on it's own, would be seeking capital payments from someone who is not on title.

Answer 4

I believe that if she is on the deed of the home and he is not on the deed then he is fine. It is the owner of the home so unless he did a quit claim deed and put his name on the property with hers then he should be fine. Call a CPA and they should be able to tell you more.