Given the high prices of real estate in the Bay Area, it is not surprising that when Marin County couples divorce, their family home is often one of their most valuable assets. If the parties agree to sell the home in connection with the divorce, it is important to keep certain capital gains tax implications in mind.
The capital gains tax is imposed on the capital gain, or profit, realized from the sale of an investment. The capital gain is measured by subtracting the taxpayer’s basis (usually the purchase price) from the sale price.
The IRS normally allows taxpayers to avoid taxation on the first $250,000 of capital gains on the sale of a primary residence. To qualify for this exclusion, the sellers must have owned the home and lived in it for at least two of the preceding five years. Married couples who file jointly can exclude up to $500,000, as long as at least one of them meets the two-year ownership and residency requirement.
When the home is sold in connection with a divorce, each former spouse can exclude up to $250,000 of capital gain on their individual tax returns. If the two-year residency and ownership requirement is not met, the former spouses can still qualify for a reduced exclusion based on a portion of the two-year period. Thus, if the couple owned and lived in the home for one year out of the last five, each can exclude $125,000 of capital gain.
Property division in a high asset divorce often raises complex tax issues. A family law attorney who is knowledgeable about the tax implications of asset transfers and sales can help a spouse negotiate a more advantageous divorce settlement.
Source: Kiplinger.com, “Tax planning for divorce,” accessed March 5, 2017