Question

Selling rental property after divorce when ex-spouse claimed all rental transactions

Forum|Forum|4 years ago
February 22, 2022
1 reply
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I believe I have a unique situation on my hands. My wife (at the time) and I were separated and started renting out our home. Then we divorced, and according to the judgement I claimed head of household, and my ex-spouse was responsible for all rental transactions for tax purposes. All these years she claimed full rental income and expenses (per the judgement), and I had none. Now we sold the house last year, and I have no idea how to report the sale. Turbotax is trying to recalculate depreciation for all the years for me, which is not what I expect because it has been claimed already. What should I do? Do I need to do it with a tax accountant? How do I reconcile the divorce judgement with the common tax rules?

TurboTax Home & Biz Windows

D

DavidD66

The reason TurboTax is recalculating the depreciation is due to something called depreciation recapture. When you sell a rental property, the total depreciation expense taken in prior years to reduce taxable net income is “recaptured” by the IRS and taxed at the investor’s ordinary income tax rate, up to a maximum tax rate of 25%. Any remaining additional profit is taxed as a capital gain at the rate of 0%, 15%, or 20%, depending on the investor’s federal tax bracket. In short, a portion of the gain on the property equal to the amount of depreciation taken in prior years will be taxed at higher rate than the rest of the gain.

Not knowing what is in the divorce judgement, I can't tell you how to reconcile it with the tax rules. If it's not clear to you, you might want to seek the help of a local tax professional (CPA or Enrolled Agent) and or your attorney.

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