If in connection with your divorce you are going to sell the marital home, you’ll want to minimize the capital gains tax you will have to pay. This becomes an issue if your gain is going to more than $250,000.
One spouse or the other receiving the marital home in a divorce settlement is not a taxable event. The sale of the home is the event that may be taxed, depending on the amount of capital gain.
Not since 1997 have you been able to defer the capital gain on the sale of a marital home by buying another one of greater value.
However, you can exclude from federal taxation up to $500,000 in home sale capital gains if you are a married couple. You can exclude up to $250,000 if you are single. But what about divorcing couples? A tax profesional, divorce mediator or Certified Divorce Financial Analyst can help you consider your options. What are some strategies to enable a divorcing couple to minimize capital gains when the home is sold?
Capital Gains Tax Strategies
1. Sell the home before the year in which the divorce is final. For example, if the divorce is going to be final in February, sell the home before the end of the previous year. That way the IRS considers that the couple is still married at the time of the home sale and entitled to the $500,000 exclusion. The couple can file a joint tax return for the year of the home sale.
2. Sometimes in a divorce settlement, each spouse retains an ownership interest in the house. Say one spouse winds up owning a certain percentage of the home and the other spouse owns the rest. If the home is sold not too long after the divorce, each spouse can exclude up to $250,000 of their respective share of the capital gain, provided: (1) each owned their part of the home for at least two years during the five-year period ending on the sale date; and (2) each used the home as a principal residence for at least two years during that five-year period.
3. Sometimes ex-spouses continue to co-own the marital home for a more lengthy period after the divorce, even though only one of them lives there. Or one ex-spouse may have sole ownership of the home after the divorce while the other ex-spouse continues to live in it. In these situations, after three years out of the home, the ex-spouse not in the home would normally fail the two-out-of-last-five-years use test above. This would cause the nonresident ex-spouse to lose being eligible to exclude their $250,000 in gain when the house is finally sold.
Fortunately, the IRS provides a way to preserve eligibility. This is done by including certain language in the divorce decree. It should stipulate that: 1) as a condition of the divorce agreement, one spouse can continue to occupy the home as their main residence for as long as is agreed upon and 2) once this period is over, the home can either be put up for sale with the proceeds split according to the divorce agreement, or one ex-spouse can buy out the other’s share for the current market value at that time. This language in the divorce decree allows the nonresident ex-spouse to receive “credit” for the other’s continued use of the home as a principal residence. Then when the home is finally sold, the nonresident ex-spouse will qualify to exclude from taxation up to $250,000 of their capital gain. The resident ex-spouse also can exclude up to $250,000 of their capital gain.
4. Say one spouse receives sole ownership of the home in the divorce. Normally that spouse’s home sale maximum capital gain exclusion is $250,000 because he or she is now single. However, if that spouse remarries and lives in the home with the new spouse for at least two years before selling, they can qualify for the $500,000 exclusion for married couples.
5. Home sale capital gains tax rates are determined by the income(s) of the owner(s). Therefore, if the lower-earning spouse receives the house in a divorce, that spouse may pay less capital gains tax when the house is sold than if the higher-earning spouse receives it. If each spouse is to receive a portion of the home sale proceeds, the larger the percentage received by the lower-earning spouse, the lower may be the overall total capital gains tax liability.
6. Again, say one spouse receives sole ownership of the home. If that spouse can wait to sell the home in a year when his/her income is low, this will minimize the capital gains tax to be paid. If we assume an income of zero in the year of the sale, in tax year 2022 for a single person the first $41,675 of taxable capital gain is taxed at zero percent; the next $418,075 of taxable gain is taxed at 15% and any taxable gain over $459,750 is taxed at 20%.
Related Posts and Pages:
Divorce Home Sale and Capital Capital Gains Tax
Marital Home Options
If I sell my house that I lived with my wife for under two years due to a divorce do I have to pay capital gains in California. My net proceeds will be $60,000.
Hi Simon, Here’s an article I wrote not long ago that should answer your question: https://morrisonmediation.com/capital-gains-tax/
Hi morrison, my husband and me own rental property in canada and we got divorced in 2020 aug and sold property jan 2021. The share is 70/30. Do we both owe capital gain as 50/50 or 70/30.
Sorry, but there isn’t a definitive answer to your question. This is something that should have been specified in your divorce settlement agreement.
I got divorced 8 years ago. He got the hew house in Florida and cash. I got the house in va. We originally paid $325k. Now 30 years later and many improvements I can probably sell for about $650-$700. But I’ve added an addition and a two car garage and replaced almost everything from the roof to the well pump. Will I be able to get to
A place of no capital gains and how?
Hi Robin, I suggest you read this article which explains how capital gains tax is calculated: https://morrisonmediation.com/capital-gains-tax/ In short, if the selling price minus purchase price minus improvements – selling costs is less than $250,000, you won’t have any capital gains tax to pay.
Hi Morrison,
2 shorts questions:
1. So, if a couple gets legally (officially) separated and separation gets recorded in the county, and one of them moves out. Separation has no effect on the capital gain tax. It is the divorce date what counts. Right?
2. if a couple wants a peaceful divorce and they already divided everything between them (they decided who gets what), and all children are adults:
A. Do they still have to get a legal separation before getting a legal divorce in Fairfax
County, Virginia?
B. do they still need to hire an attorney to make divorce legal (official)?
C. What can they do to avoid hiring an attorney?
Thank you
1) Almost certainly neither the separation date nor the divorce date has any legal bearing on capital gains tax but I am not familiar with Virginia law.
2) I suggest you find a divorce professional (it doesn’t have to be an attorney) who is based in Virginia to answer these questions.
We bought our house Dec 2019 so have owned for 18 months. If we sell before owning 2 years will we have to pay capital gains tax on profit? From what I’ve researched, I think we can qualify for partial exemption bc of divorce (“unforeseen circumstance”). Expecting to profit around $200,000. Just need to know if we would have to pay 20% taxes or not.
Based on my research
In our case, filing jointly
(18/24 x $500,000 = $$375,000). So as long as our profit is less than $375,000 we wouldn’t have to pay. Is this correct??Note
Hi Jen, You don’t give enough data to calculate any capital gains tax liability you may have. Suggest you read this: https://morrisonmediation.com/capital-gains-tax/
Hi John, We were gifted property and built a house 15years ago that has a market value of about 1.8M. Once the basis, improvement, etc. is pulled out we will be left with about 1.2M in gains (a good problem to have I know). We are now getting divorced. My spouse is stay at home parent and is working hard to stay unemployed. If we sell the house and we are not legally married, how is the exclusion calculated? If we split the proceeds and file separately we will each be subjected to $600K – $250K =$350K to pay capital gains on and I will pay 15% based on my income and my spouse will pay 0% based on no income? What if I am allowed to attribute 50K income, does that change the capital gains to 15% for my spouse to pay as well? This is so complicated. Thank you for any direction you can provide. I have already paid a CDFA early in the divorce process (too early) but it has taken so long and I am out of money to pay her again to get these answers.
Hi Amy, You’re right – it’s complicated and I don’t understand or know enough of the facts of your situation to confidently provide you with any answers. It really is a matter for someone like a CDFA. I could give you some good answers if you can invest in about an hour of my time. We could meet over Zoom. If you are interested, please email me. You can send me an email through my “Contact” page on my website.
My spouse and I are selling our house as a part of our divorce. We expect to make about 500k profit from what we purchased it for and will be splitting it 50/50. We’ve lived here long enough for the capital gains exemption but will not be able to file jointly so each can only take the 250k exemption. Do we have to claim all the profits, or just our half on the taxes?
Assuming I understand your situation accurately, you would each claim half of the capital gain from the sale on your separate tax returns (and each be able to claim the $250k exemption).
Hi John – My spouse and I own a paid-off home. After the divorce I plan to remain in the home and own the entire asset (no buyout). We are simply planning on removing my spouse’s name from the deed. After the change in the deed assigning me full ownership, do I need to live in the home for 2 years before I can sell it to qualify for the capital gain exemption? I’ve been a resident of the home for the past 20 years.
No
Is there a time limit after divorce to sell our marital property?
Ex husband is residing in the home, I am not. Divorce decree states either one of us can opt to sell. We own it 50/50. Since I’m not living in the home, will I be subject to capital gains tax? We live in Oregon.
Thank you,
Michelle
Sorry, but there’s not enough information in your message to answer your question. I think you will find the answer in the articles on my website if you read them carefully.
We sold our home Nov 2021, divorced Dec of 2021. We have to file separate since we were divorced in 2021 before the new year. As far as capital gains we made about 100,000 on the home and split it 50/50 after paying debts off. Do we have to pay taxes, or does each of us qualify for the 250K exclusion? We resided in the house as our primary residence for 10 years prior to the sale and divorce.
I lay out the basics of home sale capital gains tax here: https://morrisonmediation.com/capital-gains-tax/. Please read this article to determine if you qualify for the full 250k exclusion. There’s not enough info in your question to say one way or the other (although full exclusion is likely).
I had to refinance my home when I got divorced to pay my ex half of the equity value.
Now 15 years later I am selling the home, can I use the refinanced amount as the net basis ?
The short answer is no. Please see this article for a summary of how to calculate your basis: https://morrisonmediation.com/capital-gains-tax/
Hi. My settlement is signed and divorce is pending. I’m receiving our home. The settlement says my husband will sign the deed over to me at the time of the sale. I had a year to sell, but I’m jumping on it to take advantage of the great market. I expect to make around $650,000. I do have some improvements that can be included, but I am still expecting a big tax bill. Is there any way to mitigate this bill based on how the divorce is structured?
Thank you.
Hi Lisa, I suggest you read this article: https://morrisonmediation.com/capital-gains-tax/ to help you figure out how much the tax liability will be. The possible strategies for minimizing the capital gains tax are explained in the article you commented on: https://morrisonmediation.com/minimizing-home-sale-capital-gains-tax-in-a-divorce/. If you want advice on your particular situation, I suggest you contact a Certified Divorce Financial Analyst (CDFA) such as myself and arrange a consultation.
Hi, if I co-owned a two-family home with my ex-husband where one side was our primary residence and upon our divorce, we each lived on a side but then he moved out three years before we sold the home, would I be responsible to pay half of his capital gains tax if we file our taxes separately and split the sale proceeds?
Hi Anne, As is usually the case, there’s not enough information in your message for me to give a definite answer. And since I am now receiving lots of questions like yours in response to my article, I’ve decided no longer to give out free answers (unless the question and answer is very simple and clear). However, I am happy to discuss the matter with you if you are willing to pay my hourly rate, for which I have a 1/4 hour minimum so the cost can be very modest. If you are interested, please email or call me.
I purchased our home, principal residence, with cash I had prior to our marriage in 2005.
I put my wife on the deed. If we divorce and I continue to live in the property if say in 5 years time I sell the property will I have to pay gains tax, depending on my income.
Hi Bryan, I suggest you read this article to understand how capital gains tax is calculated: https://morrisonmediation.com/capital-gains-tax/. If you’d like to have a consultation on the matter, please contact me through the Contact page on my website and we can set something up.
Hi, my wife and I are getting a divorce and want to sell our home prior to the divorce being finalized. We will walk away with $600k+ in proceeds. Since we will still be married when our home sells are we eligible for the $500k deduction? Or since it is the same year the divorce will be finalized are we only eligible for the $250k individual deduction?
Hi Taylor,
The short answer is that you need to be married for the whole year in which the home sells to qualify to exclude $500k.
In most states, you can ask the court for a specific divorce date.
So for example you could ask the court to have your divorce be final in January 2023 if you are selling the home in 2022.
In 1982, My ex-husband bought a condo in his name for $120,000. We married in 1988, and divorced in 2011. As part of the settlement, I received ownership of the home, which at as of 2011 had a fair market value of about $500,000. I plan to sell it this year and put about half of the proceeds towards a newer, smaller condo. This year, the original condo will sell for about $800,000, and the new one will be about half that. Do I own capital gains on my ex-husband’s original purchase price, or on the fair market value of the property when it was transferred into my name?
Hi Kenni,
I would need more information to clarify your situation and advise you.
If you’d like to set up a brief consultation, please email me at john@morrisonmediation.com.
If the home is sold and the proceeds equally divided, and each party claims half the proceeds as MFS or HH, would a recalculation of the division of proceeds be triggered by unequal tax liability as a result of differing incomes? I can find no law definitive on this issue. Help!
If I understand the facts of your situation, and I can only speak for California, it would depend on the wording of the divorce settlement agreement or decree/judgment. Most often these agreements will simply state how the net house sale proceeds will be split, without regard for taxes. Then if the parties are filing taxes separately, each would have to compute and pay their individual capital gains taxes – which as you say might well be different due to differing tax rates resulting from their different incomes. But there would be no required recalculation of the division of proceeds due to the unequal taxes unless this is specifically called for in the divorce agreement / judgment.
My spouse is trying to buy out my interest in our marital home. He has remained living in the home and our divorce was over 10 years ago. Is the money from him buying me out subject to capital gains tax in Maryland?
Hi Michele, Capital gains only come into being (as far as the IRS is concerned) when a house is sold and not when one spouse buys out the other spouse’s ownership interest in the house. So you would not have to pay any federal capital gains taxon the buy-out monies you receive. I don’t know how the Maryland tax authorities view capital gains on a marital home but it’s probably the same.
Thank you for such detailed explanations, could you please provide source documents or publications for a sale of property in case of divorce ten years after the divorce was finalized. Spouse was allowed to stay in the house, both spouses owned the property 50/50 up until the sale, ten years later.
I presume you are asking for the relevant IRS publication. It’s #523. https://www.irs.gov/publications/p523#en_US_2021_publink100073087
Great article, John – just the information I was looking for and have forwarded to my client – they may be reaching out to you.
Thank you, Tim!
If I receive the home which has an apartment that was partially depreciated, and I buy out my spouse at market value, can I reduce the buyout to my spouse by half the estimated recapture and capital gains tax liability based on the current market value? She benefited from the depreciation deductions, and she will receive the capital gain in the buyout, and I feel she should pay her share of recapture as well.
You can certainly propose the buy out reduction. The general principle in California is that if you plan to sell the house in the near future (and thereby trigger the need to pay the capital gains and depreciation recapture taxes), then it’s appropriate for the two of you to share this expected liability in your divorce settlement. However, if you intend to hold onto the property (and not trigger the taxable event for a number of years), then the argument becomes why should she have to in effect pay this tax now when you won’t have to pay it until years in the future.
If we divorced years ago and still co owned the house. Say we divided the profit of sale. Do we pay taxes on the total or what we recieve individually?
You will of course file separate tax returns and each of you should pay any capital gains taxes due on what you received individually.
My wife and I divorced legally in April 2022. She bought my out of the house we lived in and I came out of it with $100,000. I have not purchased a new home yet. Will I have to pay capital gain when I do my taxes in at the end of the yr. The house was final and she refinanced in June of the same year and I was issued a check.
The possibility of having to pay capital gains tax is only triggered when the house is actually sold. Since it was not sold in 2022, there will be no capital gains tax for you to pay.