Thread: Quit Claim Deeds, Capital Gains Exclusions, and Separation

Basic question: Can a quit claim deed be used to transfer ownership in order to meet the $250,000 exclusion on sale of a primary residence?

Scenario:

Me and my partner of 13 years recently split up. We have kids, joint accounts, and most importantly for this discussion, we own two houses jointly (both on the deed) and are on both mortgages.

I now live in one house and she lives in the other. As I mentioned, we both are on the deeds for each house and on the mortgages. We are both fine with this setup (we co-raise our kids and have a very good relationship, blah, blah, blah...) but I was recently thinking about what would happen should one or both of us decide to sell the house we are living in. I am particularly concerned about capital gains taxes and the $250,000 exclusion.

Assume we don't change anything and after 2 years one of us sells a house. It would seem to me that the person living in the house would have met the requirements for the exclusion, but only be entitled to exclude half of the gains because they only own half of the property. The other individual would be responsible for paying capital gains on the their half of the profit because they don't live there.

MY SOLUTION: (please point out any flaws you see) I do a quit claim on her property and she does one on mine. That way after living in the house for 2 more years, we could sell and apply the exclusion. Is this correct?

I realize there are caveats here, such as the fact that we are still responsible for both the mortgages, but have no interest in each others houses. This is something we can live with.

THE NEXT QUESTION: The only issue I see this bringing up is regarding taxes on gifting. The values of our homes are more or less equivalent (but not exact) and so are the mortgages. Since we are both doing the quit claim, should we be concerned about it being considered a gift. Do people have to worry about this in a divorce?

THANKS IN ADVANCE!!!