Divorce Advice for Capital Gains Tax

Divorcing couples who own a home need to seek divorce advice from a tax professional to determine how capital gains tax may come into play.  Currently, the IRS allows married couples to exclude up to $500,000 of the gain from a sale of a home and individuals to exclude $250,000 from their taxable income. In order to qualify for the exclusion, the home must be the primary residence and it must have been owned and occupied as the primary residence for at least two of the last five years prior to its sale.

An attorney can provide divorce advice on how to determine the gain on the sale of a marital home, but first, the divorcing couple will need to know the cost basis on the property. Typically, the cost basis is the original amount that was paid for the home, in addition to any improvements or any deductions which becomes the ‘adjusted basis.’

For example, if the original cost of a couple’s home was $300,000 and they added a $10,000 garage, their adjusted basis would become $310,000.  Again, following the divorce advice from a qualified attorney, in order to calculate their profit or loss, the couple should subtract the adjusted basis from the selling price of their home. If the number is positive, they have a gain. If the number is negative they have incurred a loss. Their taxable gain is determined by subtracting the maximum allowable exclusion from any profits.

Before a couple finalizes their divorce, they need to obtain divorce advice to ensure that the capital gains tax burden is as minimal as possible.  The house may be listed for sale on the market and the attorney might draw up an agreement that both spouses must sign that finalizes the terms of how the funds are to be distributed after the property is sold.  Another piece of divorce advice is that both parties should evaluate their new tax statuses and possibly have a document created or clause in the contract that stipulates the liability and rights of each party.

If you find that you have a taxable gain and you and your spouse are equally responsible for any taxes due, the divorce advice provided by your attorney will likely recommend that you insert a clause in your divorce agreement that states: The parties agree that the real estate [located at 100 Washington Street] shall be sold as soon as possible and the net proceeds (after all expenses directly related to the sales of the property have been deducted) will be divided equally between both parties.  Seeking reliable divorce advice from tax and legal professionals prior to selling a home will help reduce any stress and confusion you have regarding capital gains taxes.

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