August 22, 2018
There are many assets to consider when negotiating a divorce settlement. One of them is who will live in the family home. This is not always an easy decision and sometimes the answer is to sell the home. Couples who sell their primary home in excess of basis as a result of their divorce, will likely have capital gains tax implications above a certain threshold.
According to Investopedia, Capital gain is a rise in the value of a capital asset that gives it a greater value than the purchase price plus any capital improvements (Basis). This gain is realized when the asset (in this case the house) is sold and the profit can be calculated. A capital gain can be short-term (one year or less) or long-term (more than one year) and you must claim it on your income taxes. The tax charged on this gain is called a Capital Gains Tax.
If at least one person in the couple has lived in their home for a minimum of two years out of the last five, they can usually claim an exemption on the first $250,000.00 gain on the sale. If they are still married, at least one of them owned the residence, both resided in the home for at least two years of the last five and they file jointly, they may claim $500,000.00. These requirements are referred to as the “Ownership and use tests.”
Divorced couples who satisfy the ownership and use tests may exclude up to $250,000 of the gain on their individual tax returns. Couples who did not own or live in the home for more than two years may still qualify for a reduced exclusion. Couples who lived in the home for one year may each exclude $125,000 of gain.
If one spouse receives the home in the divorce settlement and later sells the home, that person may exclude a maximum of $250,000 gain. Any time that the spouse owned or lived in the home prior to divorce is included. If the home being sold was not a primary residence or the above requirements are not met, then you would pay capital gains tax on profit from the sale.
You can learn more about the Capital Gains Tax and how it might affect your divorce settlement and much more by attending our next Second Saturday Scottsdale workshop. Please visit our registration page for more information: www.secondsaturdayscottsdale.com/registration
This article is provided as a general overview and is not intended to be legal nor tax advice. Please consult your legal and tax professional for all such advice.