What Happens If I Sell the House AFTER We Divorce?

hand giving money for housing on a gray background

By: Melissa L. Exline, Esq.

Be aware, if you sell the marital home after you divorce, the spouse that keeps the home in his or her name only may not be getting exactly what he or she bargained for.  What does that mean?  Well, this means you should take into consideration your long terms goals – i.e. if you are going to keep the house and live in it for some time, or, if you are planning to sell it in the not too distant future.

The reason this is important is because there could be a capital gain tax issue.  Generally, if one spouse moves out and the other keeps the home, the spouse that moved out, i.e. the non-resident spouse, gets “bought out” of his or her interest in the property.  That event is not going to create a tax issue.  However, if the spouse that remains decides to sell the house a year later, the spouse residing in the home might face a capital gains tax.  This will depend on how much gain or increase there is on the original purchase price, among other factors.  Each spouse gets a $250,000 exclusion amount before the capital gain tax kicks in.  So, if a home was sold by both parties (or at least was titled in both parties’ names) there would be a $500,000 total exclusion when using the non-resident spouse’s portion of the exclusion too.  This double exclusion amount could be key to avoiding a tax consequence.

It is important to share with your lawyer your post-divorce plan.  If the resident spouse remains in the home for a long time, it will not be as big of an issue because if you want the house, and you want to live there, then you take the hit.  However, if the plan is to sell in the period not long after divorce, it always makes sense to try to work into the deal the $250,000 exclusion per person. Or, an option is to adjust the home’s value to reflect the fact that if you sell it, you will be getting hit with a tax that will undermine the value of the asset.  The divorce documents must be written in such a way to take the plan into consideration regarding the home, the taxes and when/if a sale will happen.

What is this capital gains tax anyway? The capital gains tax on real property can be eliminated or lessened if it applies to the primary residence.  It applies to the taxable gain, or the selling price of your home, deducting the selling expenses and your adjusted “basis.” The basis is the amount you paid for your house (or the amount it cost you to build it), with some additions or deductions for improvements and tax benefits. But this is a general overview, so get tax advice from a CPA or tax professional if you think this might be an issue you are dealing with in your divorce.

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