I am taking out a 2nd mortgage or maybe home equity loan to pay off my ex for his share of our home. Can I add this to my cost basis of the home? I don't want to pay capital gains on his equity should I turn this into a rental. Thanks!
"Rita" wrote
Not in a division of assets, no. Your cost basis would include the entire original purchase price of the house. Any amount you pay him in a divorce is just a division of assets and does not increase your basis.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
taking a mortgage doesn't add to basis
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A mortgage is not a capital improvement. It does not add to cost basis. As it is not acquisition debt, you can deduct the mortgage interest you pay on only $100,000 unless the loan plus other loans exceed the fair market value. Then the deductible interest may be limited to an amount less than a loan value of $100K.
-- Alan
If you're using the loan proceeds to buy out your ex's share of the house, then yes, the amount your pay your ex (i.e., the purchase price - not necessarily the total loan amount) is added to your cost basis. If you convert to a rental, there's no gain to recognize until you sell the property.
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