Capital Gains Tax on Sale of Home after Divorce
- Capital gains when transferring property
- Understanding capital gains
- What else should you know about capital gains?
- How much will you pay?
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. But understanding the rules can help you make smart decisions as you negotiate with your spouse on an equitable split.
Do you have to pay capital gains when transferring property?
During a transfer, one person gives ownership of the home to another. It’s not a gift. You could transfer the home via a new mortgage that must be paid back. But a transfer means one person is staying in the place you both called home during the marriage.
The IRS says transfers like this involve no gain or loss. You and your partner aren’t required to talk about this transaction on your tax documents. To the officials, nothing happened.
If you’re considering your tax liability, a transfer can become an attractive option during divorce negotiations. But if you sell the home after the transfer, you can be expected to pay capital gains. This tax benefit is a one-time, very limited option that’s best for people who expect to stay in the home long after the divorce.
Understanding capital gains when selling a home
Some divorcing couples decide that selling the home is the best course of action to take. Neither party lives in the home after the split, and both parties share the profits from the sale. This transaction is subject to tax liability, with some important limits.
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
If your home is worth more than these amounts, you must pay capital gains taxes. This is an important fee, and it should be included as you calculate your divorce settlement.
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:
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.
How much will you pay?
The tax rate on most capital gains is capped at 15% for most individuals, but it could be higher for people filing jointly or those at high-income levels.
IRS rules also allow for higher capital gains taxes if you're selling things like coins, art, or small business stock. And if you have capital losses, your capital gains amounts could drop.
While you might not think these rules should apply to your situation, the IRS could disagree. Ignoring your liability could mean facing an audit and hefty fines for late payments. It's hard to hide a big sale like a house with all of its associated payments.
Some people ask accountants to explain their tax liability while they're deciding what to do to split their estates. You could work through each option and separate the taxes you'll pay from the amount you might gain. This is a smart way to ensure no hard feelings or surprises appear when tax time comes.
Who gets the house in divorce? How do you split the value? Try our Home Equity Buyout Calculator.
What's after divorce?
Make sure you've got everything covered with our FREE checklist.
ReferencesFive Facts on How Americans View Taxes. (April 2015). Pew Research Center.
Publication 523 (2022), Selling Your Home. Internal Revenue Service.
Topic No. 701 Sale of Your Home. Internal Revenue Service.
Topic No. 409 Capital Gains and Losses. Internal Revenue Service.
Capital Gains Tax Options: Behavioral Responses and Revenues. (January 2021). Congressional Research Service.