How to Retain Your Home’s Capital Gains Exclusion When Getting Divorced
If you are getting divorced and selling your home, you can still take advantage your marital capital gains tax exclusion. This blog post explains how. But, first, what is the home sales capital gains exclusion all about?
If you own a home that has increased in its original value (the price you paid plus any upgrades you made to it), when you sell it, you must pay capital gains taxes on that increased value. The capital gains tax rate you’ll need to pay can vary from 0% to 20%, based on your income and your tax filing status (single, married filing jointly, married filing separately and head of household.) The amount of tax you will need to pay can be quite substantial.
The good news is, if you are a single individual, you can exclude up to $250,000 of your home’s increased value from capital gains taxes, and married couples can exclude up to $500,000. To take advantage of this tax break, the home you sell must be your primary residence and you must have occupied your home for at least two of the last five years. So, if you bought a home last year and sell it this year (a year later), you will need to pay all of your capital gains taxes.
How does a married couple qualify for the $500,000 exclusion?
- At least one spouse must have owned the home for two out of the last five years. The years can be split up – one in 2019 and one in 2021 – but the time has to equal 730 days out of the past five years.
- And, both spouses must have occupied the home for at least two out of the last five years. The years can be split up – one in 2019 and one in 2021 – but the time has to equal 730 days out of the past five years.
- And, the couple must be married during the full calendar year that the home was sold. (For example: 01/31/2021 – 12/31/2021)
If you are getting divorced, here is how to maximize your capital gains tax exclusion:
Stay married a little longer!
If you meet all three of the qualifications above and you and your soon-to-be-ex can agree in your divorce settlement to stay legally married for the entire calendar year in which you sell your home, you can maximize your capital gains tax break. Then, either file a joint tax return that year and together claim up to a $500,000 exclusion, or else each of you can file “married but filing separately” returns for that calendar year, and each of you can claim up to a $250,000 exclusion.
You and your ex can continue to co-own the home, while only one of you lives there.
For many reasons, such as maintaining a stable environment for your children, one of you may decide to stay in your home. When you sell your home later, each of you can exclude up to $250,000 of capital gains, as long as both of you have occupied the home for at least two out of the last five years. You will need to sell your home within five years of your divorce to qualify for the exclusion, so that both you and your ex can get the tax break.
Buy out your spouse and stay in your home.
If you decide to buy out your ex during your divorce, when you sell your home later, you will be able to exclude up to $250,000 of your capital gains as a single individual. If you get remarried before you sell your home, you and your new spouse can together qualify for the $500,000 exclusion, as long as your new spouse has also lived in your home for at least two years.
Contact me for assistance
Deciding on the best time to sell your home is always a big financial decision, especially when you are divorcing your spouse. If you live in the San Francisco Bay Area and would like to speak with an experienced divorce attorney with a Master of Laws in Taxation, please contact my office for a consultation.
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