During a divorce, which is an emotional challenge in its own right, you will likely have to divide one of the most significant assets: the marital home. During this time, it is essential not to overlook the potential tax implications of selling a home during a divorce. It’s important to be intentional and deliberate when it comes to selling your home. Take the proper steps now to set yourself up for the future.
For example, the home sale exclusion is a lucrative tax break for married couples. Though we will elaborate upon it in the next section, it allows married couples who file jointly to exclude up to $500,000 of their profit from the sale of their primary residence. This is an exemption that can be jeopardized during a divorce. Let’s take a closer look at the tax implications of the home sale amidst a divorce, so we can outline the rules and considerations to protect your interests during a challenging time.
The Home Sale Exclusion
As mentioned above, you can most likely exclude up to $500,000 from the sale’s profits. However, there are specific criteria involved. To qualify, couples must have owned and used the home as their primary residence for at least two of the five years prior to the sale. The two main components are ownership and use.
The trouble arises when a divorcing couple fails the “use” part of the test. For instance, if one spouse moves out of the home, they may not meet the principal residence requirement. Thus, they may not qualify for the exclusion of their share of the profits. This is what creates tax implications. The spouse who moved out of the home may pay more taxes. As with all of your divorce-related problems, we can help you find the solutions that fit you. If the ownership of the house is transferred to a taxpayer as part of the divorce process, they will be viewed as if they owned the home when their former spouse owned it. This is one way to ensure the transferring spouse does not suffer disproportionately from the home sale’s exclusion rules.
Protecting Your Interests
To preserve the home sale exclusion during a divorce, address it in the divorce or separation agreement. An attorney can use precise language that outlines the terms as they apply to your home. One spouse, for example, can maintain the right to live in the house until the appropriate time has passed.
Conversely, the resident spouse who lives in the property can be treated as if they own it, which enables them to sell it immediately. Under this scenario, they can claim a $250,000 exclusion. Additionally, this would circumvent the need to wait until the two-year use period has been met.
Protect Your Interests
Even if you are still worried about your home and its tax implications, take comfort knowing that the intricacies of tax law and divorce overwhelm most people. This is why people seek the assistance of professional legal and tax advisors who understand family law matters. Empowered Family Law, P.C. is committed to providing you with the support you need during this challenging time. We understand the complexities of dividing assets and will protect your rights. We will arm you with the information you need to make informed decisions at each step in the process. Contact Empowered Family Law, P.C. to set up your consultation.
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- Tax Considerations For Selling Your House During A Divorce - September 6, 2023
