Transferring a residence to spouse

What you are suggesting is known as a "related-party transaction". It has no economic substance other than a phantom tax benefit and would be dissalowed upon audit - which means penalties and interest.

Not on your house.

Dick

Nad, you always have so many interesting tax experiences...

I don't see how *you* could get a step up in basis if your wife owns the house.

Why would you sell a house for $200K less than it's worth?

Do you live in a community property state? If she lives with you, maybe she owns more of your house than you think.

-Mark Bole

"The IRS has not issued a definition for taking a position."

"Can I "sell" the house to my wife for $400k and get a $250k step-up in basis (assuming she doesn't sell it for several years)." asks NadCixelsyd.

No, you can't do that. IRC Section 1041 provides that between spouses, a transaction that "looks like" a taxable sale, isn't a sale at all. It's closest to being a gift. There's no gain recognized and there's no step up. Or step down. The tax basis that the property had in the hands of the "giving" spouse becomes the tax basis of the property to the "receiving" spouse.

You should read Section 1041, as quite often it will dictate the results of transactions between spouses, and the result can be very surprising.

How? As property purchased before the formation of the community, it is separate property.

IANAL, but I have read comments on more than one occasion along the lines of the following, which I found with a quick web search.

"Increased equity in separate property may become community property in certain circumstances, and separate property that is commingled with community property often becomes community property. You should check your state law and get advice if there are questions. "

-Mark Bole

not if the mortgage has been paid with community assets.

That means that comingling has occurred. Simply marrying someone and living with them in a community property state doesn't necessarily comingle their (pre-marital) assets. Otherwise, there would be no need to have IRC Section 66.

IRC Sec. 66 deals with community income, not property ownership.

The point was, if spouses co-habit a personal residence owned by one of them for a number of years, it seems likely to me that some commingling would occur, since there are so many expenses of keeping and maintaining a residence. It may just be the appreciation on the property that becomes part of the community, for example. (more of a legal issue than a tax issue, although both apply).

Cixelsyd stated that his wife "has never owned real estate before", the item I responded to. If in fact she did own some portion of the house already, that would affect the tax treatment of the sale, if it wasn't already out of the question for other reasons already given.

-Mark Bole

true, but those facts were never given, yet you came to a conclusion that it remained separate property. that may or may not be the case.

=====> Most of my postings are not experience. I'm always playing "what if" with taxes.

=====>OK, my wife would get the step up in basis.

=====>If I sold it to her for full value, I'd have to pay taxes on the $200k. Consider the $200k a gift (we are happily married)

The idea for a sale to your wife won't work. But you have a misconception. If you have lived in your house for at least three of the last five years, you can sell it and have profit of $500,000 excluded, because you are married.

price and buy another one. You get tax free income and stepped-up basis in the new home.

Stu

I am aware of that. However, it does also deal with the comingling (or lack thereof) aspect of community property.

Unless the owning spouse has the discipline to pay for all of the household expenses from separate income that goes into a separate bank account, I agree.