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.

Principal residence

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.

Buyouts

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.

Co-ownership

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!

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