A divorce case 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 occurring as a result of your divorce. However, it is important to avoid neglecting your financial planning during this challenging time.
One aspect commonly forgotten about by divorcees is how a divorce can 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 properties you rent out will not qualify for the exclusion.
Selling your house together
In the case of you 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 will 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 the arrangement stems from a divorce settlement or court order, the exclusion will still be available to you.
Complete tax planning
Of course, capital gains taxes on a home is just one type of tax liability you will need to incorporate into your 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. Call us for a complimentary consultation to see if we can help with creating an effective tax planning strategy.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.