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Capital Gains Taxes and Divorce

 

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Did you know...?

 

 

 

The spouse who leaves the family home can still get a $250,000 exclusion from capital gains taxes.

 

 

Before the Tax Relief Act 1997 (TRA ’97), if one spouse left the house two years before the divorce was final, they lost their ability to roll forward their capital gain. In cases where there is significant capital gain in the family home, TRA ’97 allows both spouses to take a $250,000 exclusion even though only one spouse is awarded the house.

Our new exclusions allowed under TRA ’97 include,

- Single taxpayers can exclude $250,000 from capital gains
- Married filing jointly can exclude $500,000 from capital gains
- These exclusions are allowed for one sale every 2 years
- The selling spouse must have lived in the house at least 2 out of the last 5 years.
(Change in place of employment, health or unforeseen circumstances allow an exception)

Ownership test

If one spouse, pursuant to a divorce decree or separation agreement is required to grant the other spouse the right to temporary possession of the home, but retains title to the home, and the home is later sold, the non-occupying spouse will be treated as having owned the home for the period of time that the occupying spouse owned the home as principal residence.

Use Test

In the event one spouse transfers a residence to the other pursuant to a divorce decree, the “transferring spouse” shall be able to include the “receiving spouse’s” use period in computing their own use period.

NOTE:

If one or the other remarries prior to sale of home jointly owned with the former spouse, the remarried spouse can use the new spouse’s time in the home to meet residency requirements to use the “married filing jointly” exclusion amount.

Let’s look at an example:

John and Mary are getting divorced. Under the divorce decree, Mary is awarded the jointly owned family home for six years until their son graduates from high school. At the end of six years, Mary will sell the home and 50% of the proceeds will be sent to John.

Mary sells the home for $750,000. Mary and John will each receive $375,000. If the basis in the property was $100,000, Mary’s portion of the basis is $50,000 leaving her with $325,000 gain. Even though she uses her $250,000 exclusion, she will be taxed on $75,000 of gain.

 

 

 

Captital Gains

 

 

Before the Tax Relief Act 1997 (TRA ’97), if one spouse left the house two years before the divorce was final, they lost their ability to roll forward their capital gain. In cases where there is significant capital gain in the family home, TRA ’97 allows both spouses to take a $250,000 exclusion even though only one spouse is awarded the house.

Our new exclusions allowed under TRA ’97 include,

- Single taxpayers can exclude $250,000 from capital gains
- Married filing jointly can exclude $500,000 from capital gains
- These exclusions are allowed for one sale every 2 years
- The selling spouse must have lived in the house at least 2 out of the last 5 years.
(Change in place of employment, health or unforeseen circumstances allow an exception)

Ownership test

If one spouse, pursuant to a divorce decree or separation agreement is required to grant the other spouse the right to temporary possession of the home, but retains title to the home, and the home is later sold, the non-occupying spouse will be treated as having owned the home for the period of time that the occupying spouse owned the home as principal residence.

Use Test

In the event one spouse transfers a residence to the other pursuant to a divorce decree, the “transferring spouse” shall be able to include the “receiving spouse’s” use period in computing their own use period.

NOTE:

If one or the other remarries prior to sale of home jointly owned with the former spouse, the remarried spouse can use the new spouse’s time in the home to meet residency requirements to use the “married filing jointly” exclusion amount.

Let’s look at an example:

John and Mary are getting divorced. Under the divorce decree, Mary is awarded the jointly owned family home for six years until their son graduates from high school. At the end of six years, Mary will sell the home and 50% of the proceeds will be sent to John.

Mary sells the home for $750,000. Mary and John will each receive $375,000. If the basis in the property was $100,000, Mary’s portion of the basis is $50,000 leaving her with $325,000 gain. Even though she uses her $250,000 exclusion, she will be taxed on $75,000 of gain.

 

 

 

The Divorce Resource Center of Colorado is committed to changing the way our society divorces. We envision divorce to be a process that does not end with a Decree, but one that is a catalyst for change that leads to new beginnings. Our goal is to provide resources that will empower clients in each and every step of their journey through the difficult life transition of divorce and beyond. Join us for our Second Saturday series! CLICK HERE for more information!

 

 

 

 

 

 

Your Divorce Can Create Empowering Choices!