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Divorce, taxes and your home

There are numerous emotional and financial issues that you must consider when you go through a divorce. The family home, which is most likely your largest asset, is one of these issues with serious financial and tax consequences. These should be considered along with other family law matters when you end your marriage.

Potential tax break

Your primary home may be worth more now than when you bought it several years ago because of rising property values in many locations. While this may make its sale more profitable, you may have to pay capital gain taxes on the profit. The tax rates are 0 to 20 percent, depending on income.

The federal government provides a tax break, however. If you meet its qualifications, you do not have to pay capital gain taxes on the first $250,000 of profit if you are single or $500,000 of profit if you are married.

Tax break requirements

For this tax exemption, you must meet certain requirements. First, you must have owned the home for at least two years before its sale. For married couples, at least one spouse must pass this ownership test.

Residency is the second part of the test. The home cannot be a vacation property and had to be a primary residence for two of the last five years before the sale. Both spouses must meet this residency requirement to be eligible for the $500,000 tax break.

Plan your divorce agreement

Your negotiations or litigation on property division and the ultimate divorce decree can have long-term consequences on many issues, in addition to taxes. For example, you may not pass the residency test if one spouse stays in the home and it is sold several years later.

But planning can still allow this tax break. Placing language in the separation or divorce agreement addressing and allowing this residence can still preserve this tax exemption. It is easy to forget this language which can lead to the loss of a $250,000 or $500,000 tax break.

Decisions made during divorce can have unforeseen but long-term and serious consequences. An attorney can provide you with options and help seek a fair and reasonable decree that addresses your financial situation.