In some divorces, the marital home is sold and the proceeds are split somehow. In other divorces, one spouse is awarded the marital home or the spouses continue to own the home jointly, either of which defers its sale until sometime down the road. When the home is sold, the question arises as to whether capital gains tax will have to be paid.
If so, this can be up to 20% of the gain in federal tax and up to 13% in California state tax. Fortunately, capital gains tax does not have to be paid on most home sales.
Before we get to the rules allowing “exclusion” of the gain from your taxes, let’s first summarize how to figure out the amount of gain on a house sale.
Calculating Capital Gain
The basic formula is: capital gain (or loss) = selling price – selling expenses – purchase price – improvements.
Selling expenses do not include paying off the mortgage. The outstanding mortgage balance doesn’t figure at all in the amount of the capital gain.
Improvements are expenditures that added to the value of your home, prolonged its useful life, or adapted it to new uses. A new roof or a kitchen upgrade are considered improvements; repairs and paint jobs are not.
As an example, if you sold the marital home for $600,000, paid $45,000 in selling costs, bought the house for $230,000 and paid $25,000 to upgrade two bathrooms, your capital gain would be $600,000 – $45,000 – $230,000 – $25,000 = $300,000.
If you took a tax deduction in prior years for using part of the house as a home office, this will increase your gain.
As mentioned above, usually there is no capital gains tax to pay on the sale of a principal residence. Why? Because the tax laws allow large amounts of gain to be “excluded” from consideration.
The maximum amount of capital gain on a home sale that an individual can exclude from taxation is $250,000. A married couple filing jointly can exclude up to $500,000.
So in the example above, a married couple could exclude the whole $300,000 in capital gain and pay no tax. But an individual would owe capital gains tax on a gain of $50,000 ($300,000 – $250,000).
Capital Gains Tax Amounts
Capital gains are taxed by the federal government and by states.
For the IRS, in 2022, the long term capital gains tax rate (for assets held a year or more) could be 0%, 15% or 20%, depending on your filing status, and taxable income. For married couples filing jointly, the tax rate in 2022 is 0% if your total taxable income is $83,350 or less, 15% if your taxable income is between $83,350 and $517,200, and 20% if your taxable income is greater than $517,200. For individuals using the Single filing status, the tax rate in 2022 is 0% if your total taxable income is $41,675 or less, 15% if your taxable income is between $41, 675 and $459,750, and 20% if your taxable income is greater than $459,750.
California taxes long term capital gains in the same way that it taxes ordinary income. So depending on your tax bracket, the tax rate on the capital gain from a home sale will be anywhere between 0% and 13%.
Is Your Home Sale Eligible for the Exclusion of Capital Gains Tax?
Here are the basic eligibility requirements:
- The sale must be of your main home, i.e. your principal residence.
- You must have owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date the sale closed.
- You must have used the home as your principal residence for at least 24 months of the previous 5 years. The 24 months of residence can fall anywhere within the 5-year period; it doesn’t have to be a single block of time.
- You may claim the exclusion only once during a two-year period. So the date of sale must be at least two years since you last sold a home and claimed the exclusion.
Here are some divorce-related rules and exceptions:
- Generally, if you transferred your home (or share of a jointly owned home) to a spouse as part of a divorce settlement, you are considered to have no gain or loss.
- If your home was transferred to you by a spouse, you can count any time when your spouse owned the home as time that you owned it. However, you must meet the residence requirement above on your own.
- Let’s say a separation or divorce occurred during the ownership of the home. If you were separated or divorced prior to the sale of the home, you can treat the home as your residence for tax purposes if:
- You are a sole or joint owner and
- Your spouse or former spouse is allowed to live in the home under a divorce or separation agreement and uses the home as his or her main home.
- If you don’t meet the eligibility requirements above, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event. Becoming divorced or legally separated qualifies as an unforeseeable event.
The information above is summarized from IRS Publication 523 – Selling Your Home. For questions relating to your particular situation, you may want to consult with a tax professional and/or a Certified Divorce Financial Analyst (CDFA.
Related Posts and Pages:
Marital Home Options
Marital Home Data Gathering
Minimizing Home Sale Capital Gains Tax in a Divorce
Sold our house in March 2021 and got divorced May 2021… do I need to file jointly with my ex wife ? And if not what documents we need to have to divide the taxes ?
Sorry, but you haven’t provided enough data to answer your questions. I don’t know what State you are in or if there will be any tax liability resulting from the sale. If you’d like to set up a meeting to talk this through, please let me know.
We sold the house in Texas on 2 October 2021, divorce was final on 21 October 2021. We owned the house for 16 months. I relocated to Florida and purchased a house for me on 17 Dec 2021, ex-husband stayed in Texas. How do I file taxes? Do I have to pay capital gains for divorce and relocation?
Hi Susana, I’m sorry but you haven’t provided enough data for me to answer your question. For complicated questions like this, I would suggest not trying to get or relying on a free answer that someone gives you over the internet. I would suggest an in-person meeting with a tax professional.
I’m not working and getting a spouse support after long marriage divorced.
Also While we were sharing the assets I got the house.
This year, 2 years after we got divorced ( in 2020) I want to sell the house.
I know that I don’t have to pay capital tax for first profit of 250000.
But For the rest of the profit, would my maintenance that above 40000 a year, be considered as my income so I’ll have to pay capital tax of 15%? or in that case I don’t have to pay any capital tax since the maintenance are not considered as income?
For divorce agreements entered into after 12/31/18, (spousal support) is no longer taxable income for the recipient for federal income tax purposes. It may still be taxable for State income tax purposes. For prior divorce agreements, it is normally considered taxable income, unless the divorce agreement specifies otherwise. It was never considered (or taxed as) a capital gain.
My ex husband and I purchased my current residence 22 yrs ago. We both lived her until he moved April 2021 and I have lived here since. We divorced Jan 2020. Divorce papers included the following : “respondent may continue to reside at property for period of up to 2 yrs as long as both parties are in agreement”. Ex moved off property April 2021. I was awarded the property. I am selling the property this year with a cap gain of aprox $600K. Can I still claim the $500K cap gain exclusion. If so, my tax accountant does not seem to know about this. And how would I go about this? My income for 2022 otherwise will be $36K. Thank you so very much in any help you can provide! Sincerely
Hi Linda, Because I am now getting a lot of people contacting me about this issue, I no longer am giving free answers to people. I will answer your question in a phone call or Zoom meeting but I have a modest minimum charge for this. If you are interested, please email me at email@example.com.
Oh I forgot to add I live in Oregon. Thanks again!
Hello, I appreciate your answers. My question is, if my (now ex) husband and I bought a house for 400K in 2000, divorced in 2015 at which time I paid ex husband 300K for his share of the marital home, and if I am now selling it in 2022 for 1million… what is my cost basis. Is it 400K (initial purchase) + 250K (my single person federal deduction) + home improvement and closing costs + the 300K I PAID HIM IN 2015 AT DIVORCE FOR HIS SHARE OF THE PROPERTY? OR, is that 300K NOT included in my cost basis? Thank you in advance very much.
Hi Racquel, Sorry but the $300k you paid to buy out your ex-husband would not be included in your cost basis.
I am in the process of a divorce and we are closing on our house July 1. Based on your equation above, we sold for $627,000, have 27,000 in selling costs, purchased for 320,000 and put about 75,000 into it while living there for a kitchen remodel, bathroom remodel, new deck and custom built storage shed in the yard. That puts the capital gain at 205,000 – below the single exclusion amount of $250,000. We will divorce by the end of 2022 and I plan to file single. I’m also planning on asking for most proceeds from the house (which are well above the $205,000 after mortgage is paid off) and not taking any of my ex-spouses retirement. I’m thinking I’ll receive more like $350,000 after all debt is paid off. Will I be taxed on any of that amount?
Yes, perhaps. If your share of the capital gain is greater than $250,000 and you file singly, there will be some capital gains tax to pay. A simple solution is to delay your divorce to 1/1/23 and file a joint return for tax year 2023. That way up to $500k in gain can be excluded.
This is a great article! Very informative thank you!
My husband and I bought a house for 265,000 in 1989. We were divorced 16 years ago and I bought him out for 250,000. I am contemplating selling at 1.5 million And still owes $320,000 on the property.
I am currently disabled with non-taxable income. Is it correct that I will not pay capital gains in this case? Am I understanding the article correctly?
I’m afraid not. You will have substantial capital gains tax to pay.
If you’d like to set up a relatively brief paid consultation, I can give you an estimate of the amount.
If so, please email me firstname.lastname@example.org.
If you know, going into a home purchase, that one party is likely to eventually want to buy out the other, is there any way to plan for/cushion the fact that the person who does the buying out will not be able to change their cost basis, and will therefore be hit with a larger tax bill than the person bought out?
The short answer is yes. This could / should be part of the divorce settlement conversations / negotiations.
If you’d like to discuss this more tailored to your situation, please email me and we can set up a brief consultation.
Hi there – Thank you for the great info on this site. I co-own a house with my brother that will be sold soon. The house is his primary residence but not mine. If the total capital gain is less than $250K, can he claim all the gains so that I can avoid capital gains taxes or does it have to be split in half?
Hi Jean, I normally just address tax issues for divorcing or separating couples but here is an article you might find helpful: https://www.nolo.com/legal-encyclopedia/how-does-the-capital-gains-tax-exclusion-apply-three-co-owners-home.html. In short, your brother can claim all the gains.
I have a question. My ex and I bought a house 5 years ago. We separated 6 months after we bought and I have lived in the home since. I’m currently in the process of selling the house due to divorce decree and my ex would be entitled to 50% of the equity from the sale. As my ex hasn’t lived in the home to qualify for the 2/5 years would my ex be paying capital gains tax while I’d be exempt.
Hi Mark, First you want to calculate the amount of the capital gain as described in this article. Then establish who will be getting what % of the gain per your divorce agreement (apparently 50/50 in your case). Then see who (either or both of you) meets the required tests to be able to exclude $250k of the gain from taxation (apparently only you). Then you know who is responsible for how much of the gain and who can exclude how much of the gain from taxation. If you want to get into more detail about your specific situation, we can arrange a short consultation if you are interested.
My estranged husband recently had me sign over all ownership of the house to him (he purchased before we were married). He now wants to file taxes jointly (delaying the divorce) so that he can have the $500,000 deduction. Does he no longer qualify for that since I am not a co-owner nor do I live in the house?
As a general rule you shouldn’t change ownership of assets in a divorce without first having a complete divorce settlement agreement. But to answer your question, he is OK to claim the $500k exclusion for capital gains tax purposes, assuming you meet the requirements spelled out here: https://www.irs.gov/taxtopics/tc701
I am in PA and house was in PA
I bought a house in on 9/30/2021 (settlement date)
But as part of divorce sold on 7/28/2022
I moved out of the house on because of court order on 11/7/2021 and lived with my family. My ex continued to live the the marital home again as per order. I did not own any other property
Divorce was finalized in august of 2022
Q1. Can I claim
Q2. Do I need to pay short term capital gain?
Hi Sirish, As we discussed over the phone, I need some additional data, which you’ll provide, and then I’ll give you a definitive answer for a reasonable fee.