- What is a capital gains tax?
- How does it work if we sell and split?
- How does it work if one person buys out the other?
- Strategies to avoid paying too much
- Other things to know about capital gains
- Free 32-page resource
Going through the divorce divorce process is emotionally and financially hard. One of the biggest decisions you might have to make is what to do with the family home you shared with your former spouse. Will you sell it? Will one spouse buy out the other? What about capital gains tax? Will that affect your divorce settlement?
More than 30% of Americans like doing their taxes, as they expect a big refund check. But if you sold your home during the divorce, you could have a very different result. Your home is an asset, and if you sell it, tax officials will hear the news. You could be on the hook for some of those profits when tax season comes around.
If you don't sell your home but transfer it from one party to another, you could avoid capital gains requirements. But if you sell other items (like stocks or bonds) to make the transfer sweeter for the party who no longer owns the home, you could be required to pay fees on that transaction.
Just like divorces, taxes can get pretty complicated. Understanding the rules can help you make smart decisions as you negotiate with your spouse on an equitable split.
What is a capital gains tax?
Capital gains tax is a levy you pay on the profit you make from selling assets like real estate or investments. If you bought your house for $200,000 and sold it for $300,000, you'd be liable for capital gains tax on the $100,000 profit.
Amid a divorce, the application of this tax can be complex. Whether you decide to sell the home together or if one spouse buys out the other, different tax implications come into play.
How does it work if we sell together and split the proceeds?
If you and your spouse decide to sell your marital home, you'll likely split the proceeds. The division typically depends on the terms of your divorce decree or settlement agreement. However, the application of capital gains tax could complicate matters. It could potentially impact how much each party ultimately receives.
If you sell your house while you're still legally married and meet certain residency requirements, you could potentially exclude a significant portion of your profit from capital gains tax.
If you both considered the home your primary residence for two of the past five years, you could exclude the following gain amounts from your taxes:
- $250,000 if you’re filing alone
- $500,000 if you’re filing a joint return with your spouse
The situation becomes more complex if you sell the house after your divorce has been finalized. In this case, each ex-spouse can only exclude up to $250,000 in capital gains. If the profit from the sale price of your home exceeds this amount, you could be hit with a hefty tax bill.
If one spouse has been living outside the home for a significant period before the sale, they may not meet the residency requirements to claim the exclusion. The IRS requires that you have lived in the home for at least two years out of the five-year period prior to the sale to qualify.
How does it work if one spouse buys out the other?
If instead one spouse decides to buy out the other as part of the divorce settlement, capital gains tax still applies, but in a different way. The selling spouse may be liable for capital gains tax on their portion of the home's increased value unless the buyout occurred during the divorce proceedings.
If you’re the buying spouse, you’ll owe capital gains on the increase in value when you sell the home. Notably, you’ll be able to claim an exclusion of $250,000, provided you meet the IRS qualifications when you sell.
Check out our home equity split calculator designed expressly for divorcing spouses to play with different possible financial scenarios. It’s free to use.
Strategies to minimize the amount paid
There are strategies to minimize the amount of capital gains tax you pay.
- One strategy is to sell the home before your divorce is finalized. This allows you to take advantage of the $500,000 exclusion for married couples filing jointly rather than the individual $250,000 exclusion.
- Another strategy involves specific language in your divorce decree. For example, if the decree states that one spouse will live in the home for a certain number of years after the divorce, they may be able to claim the full $250,000 exclusion upon selling, even if the other spouse no longer lives there.
What else should you know about capital gains?
Just about everything you own or use as a personal item or investment tool may be considered a capital asset per the IRS. Selling these items could impact your tax liability in the coming year.
Some couples settle their estate by selling off their joint holdings, including the following items:
- Stocks
- Bonds
- Antiques
Capital gains laws are complex. Your liability, per the law, is the difference between “the adjusted basis in the asset and the amount you realized from the sale.” If you’re not certain what that means, you’re not alone.
Free 32-page resource
Because we know clients struggle with so many aspects of marital home division, we created a free 32-page downloadable workbook to give you the following: - Access to our three-step home solution
- Information about learning your home's worth
- An easy-to-understand primer on home equity
- Details on options you may not have known about
- And lots more
Need help understanding your home-related options?
Download Divorce & Your Home, our free three-step home solution with tips and worksheets to help you understand and make the most of your home's equity.
At Hello Divorce, we’re experts in our field. We get the ins and outs of what you’re going through – not only the emotional turmoil but also the legal and financial headaches you may face. We’re here to help. Want to learn more? Visit our plans page, our services menu, or our calendar to schedule a free 15-minute real estate strategy call with one of our friendly account coordinators.
Suggested: Selling or Buying Your Home during or after Divorce
