Don’t Make this $500,000 Mistake When Selling Real Estate In A Divorce

What happens if the marital home is sold years after the divorce? If you are the non-occupying and non-owner spouse can you still qualify for the capital gains exclusion?
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What to do with the marital home in a divorce can be challenging. If you are considering divorce, we generally see couples take one of three paths:

  1. The first two options are where either you or your soon-to-be-ex will stay and buy out the other spouse. An appraisal is generally required and value offset considered to make this work. You must consider the tax basis of different assets to ensure an accurate buy-out calculation. I have also seen situations where one spouse rents from the other as a form of alimony and/or property division.
  2. The last option is where you decide to sell the home either before, during or after the divorce.

The divorce decree will be the final say as to how the home will be sold. To be sure that you are including language that will cover all of your present and future concerns, you should discuss the disposition of this property with an attorney. There are other considerations that you may learn about if you consult with an attorney.

It’s important to remember that selling the home could create tax issues. Consulting a tax advisor should be a priority to determine whether or not the capital gains exclusion rules will apply in your situation. The exclusion is $500,000 (if married) and $250,000 (if single) if you have owned & lived in the home for two of the last five years. Tax law allows for a former spouse to use their ex-spouses use or lived-in rule, to potentially qualify for capital gains exclusions.

It’s important to remember that the IRS considers you divorced at the end of your tax year. If you were married when you sold your home in October but the divorce was finalized in December – the IRS will consider you divorced in that tax year. When you file your taxes (unless you remarry), your only filing option will be single or head of household. It does not matter that you were married when you sold your home. Thus, when you report the sale of the home – the $250,000 capital gains exclusion rule will apply, not the $500,000 rule.

What happens if the marital home is sold years after the divorce? If you are the non-occupying and non-owner spouse can you still qualify for the capital gains exclusion? If it is sold pursuant to the divorce decree, the non-occupying spouse can still use their ex-spouse’s use or ownership period to qualify for their own capital gains exclusion. Be sure the language in your decree specifically addresses this issue so you can save thousands of dollars upon that future sale. Find a Certified Divorce Financial Analyst and tax practitioner who can assist clients and attorneys correctly address this issue.

Also, if you purchased your home prior to 1997 and rolled gains in from a previous home, your tax basis could be further reduced, exposing one or both of you to significant tax liabilities. What’s the bottom line? Consult with a tax advisor in addition to your attorney. Determining the tax basis on your primary residence should be an important part of the divorce discussion. I will not address that topic here but in another post.

If you are selling the property, here are some of the things you may want to consider. This list does not contain everything you should consider. Here are some questions we review with clients who are discussing the disposition of real estate:

  • What is the value of the property at the time of the divorce?
  • What is the dollar amount of equity in the property at the time of the divorce?
  • Who will be responsible for listing the property?
  • Do both of you need to agree on a listing agent?
  • By what date should the property be listed?
  • What should the initial listing price be?
  • What happens if the person who is supposed to list the property does not list it timely and for the agreed-upon price?
  • How long should the home be on the market before the price is lowered and how often and how much should the price be lowered to optimize the chance of a sale?
  • Who has the right to accept or reject purchase offers?
  • Who has the right to negotiate any special requests a purchaser might raise, such as reducing the price, making repairs, purchasing appliances, etc.?
  • What should happen with the proceeds from the sale?
  • What happens if the property does not sell?
  • Who is responsible for upkeep, taxes, mortgage payments, and all other expenses related to the property before it sells?
  • Who will have use and possession of the property pending the sale?
  • If there are any special costs or expenses related to the sale of the property, such as capital gains taxes if the property being sold is business or investment property, who will pay these special costs and expenses?

Contact us today If you are selling your home and need tax or financial assistance! DIY is great for tile & grout, but when it comes to divorce – don’t mess about!

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