A divorce can be a trying time in many people’s lives. With all of the emotional turmoil that is common during a divorce it can be difficult to concentrate on all of the financial changes that are occurring as a result of your divorce. However, it is important to avoid neglecting your financial planning during this challenging time.
One aspect that is commonly forgotten about by divorcees is how a divorce will affect your capital gains tax liability. This can be significant especially when it comes to figuring out how to divide ownership in real estate.
If you sell your principal residence, you and your spouse can exclude the first $250,000 in capital gains from your tax liability. Your home will technically qualify as a “principal residence” if you have lived in the home at least two of the last five years prior to selling the property. This means your vacation home and investment property that you rent out will not qualify for the exclusion.
Selling your house together
In the case of selling your home along with your spouse while you are in the middle of the divorce, you will be allowed to exclude up to $500,000 in capital gains from your tax bill.
However, you will need to have lived in the home at least two of the last five years prior to making the sale.
Many times, a part of the divorce settlement will have one spouse buy out the other spouse’s ownership in a family home. In this case, you should not have to worry about capital gains tax. On the other hand, after you buy out your spouse and continue living in the home, you will be liable for capital gains tax when you decide to sell to a third-party. However, you will still be able to exclude the first $250,000 if you lived there for two years prior to selling.
In some divorce settlements one spouse may remain a co-owner of the family home but will be required to move out, leaving the other spouse to live in the home. For tax purposes, this does present a risk that you may not be allowed the $250,000 exclusion. You should make sure to
have the agreement documented in writing. As long as it is clear that the arrangement stems from a divorce settlement or court order, the exclusion should still be available to you.
Complete tax planning
Of course, capital gains tax on a home is just one type of tax liability that you will need to incorporate into your post-divorce personal financial plan. It is a good idea to think strategically about taxes and do what you can to minimize your tax liabilities. Taxes are also important when planning for retirement and creating an estate plan. Consulting with a financial professional, like ours at Rademacher Financial, Inc, who understand and are up to date with the latest in tax laws and rules can help you to develop an effective tax planning strategy. Please give us a call to discuss how we can best serve you as you contemplate these questions!
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Rademacher Financial, Inc. and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.