Tax Efficient Gifting of Home Equity in Divorce

I don't think so, wouldn't it just be a transaction with no economic substance but to avoid taxes? Plus, OP mentioned mortgage, it's hard to see how bank procedures would allow this to go smoothly.

It seems that while tax law provides some breaks for being married (for example, double the home sale exclusion even if only one spouse ever contributed anything to pay for the home), there are no tax breaks for getting divorced and you lose the ones you had when you were married.

-Mark Bole

No.

Certainly, the third party gets economic benefit: $5K profit. That's certainly economic substance.

And selling a house pursuant to a divorce is certainly an allowed transaction.

(And if their neighbors are in the same situation, buying each other's house would certainly make the transaction work.)

That's a separate issue; but OP said that W has a large bank account, so they could use seller-provided mortgages (remember, everything settles the same day so they're just shuffling paper) for the rest.

Seth

Courts generally find reciprocal transactions that seem to allow you to do something you otherwise would not be allowed to do, to be shams and disallow them.

For example if you create a trust for yourself, you can't protect trust assets from your creditors. But if you create a trust for someone else, you can. However if A creates a trust for B and B creates a trust for A, the protection from creditors is disallowed.

But I really wanted the house with 3 bathrooms, and he really wanted the one with a larger kitchen.

Cash is fungible. Real estate isn't.

Seth

Trading homes is one thing. Trading homes and increasing the basis by $500,000 each is entirely another.

The situation that started this was the suggestion that husband and wife who are divorcing, sell their property to a third party, and the wife will then buy it back for very slightly over that price. The goald would be for her to have an increased basis as the result of what would normally be considered a transfer incident to a divorce, which would not result in an increase in basis.

That kind of thing is referred to as a collapsible transaction. When a series of permitted transactions appear to be done for the purpose of accomplishing a non-permitted goal, the middle steps can be ignored and as a result the goal would not be accomplished.

In the suggested situation the IRS would be able to reject the wife's claim of an increase in basis because the middle steps would be essentially useless ones except to accomplish a goal not permitted by the tax code.

No, they'd have even more work, arguing over whether a particular law was "fair and logical".

Seth